```

[Senate Hearing 109-39]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 109-39

                   S. 241, PERMANENTLY EXEMPTING THE 
    UNIVERSAL SERVICE FUND FROM PORTIONS OF THE ANTI-DEFICIENCY ACT

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 11, 2005

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

                    U.S. GOVERNMENT PRINTING OFFICE
21-486                      WASHINGTON : 2005
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMint, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
                David Russell, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 11, 2005...................................     1
Statement of Senator Inouye......................................     2
    Prepared statement...........................................     2
Statement of Senator Nelson......................................    45
Statement of Senator Pryor.......................................    53
Statement of Senator Rockefeller.................................     2
    Prepared statement...........................................     2
Statement of Senator Snowe.......................................    43
Statement of Senator Stevens.....................................     1
Statement of Senator Sununu......................................    51

                               Witnesses

Abshire, Sheryl, District Administrative Coordinator of 
  Technology, Calcasieu Parish Public Schools....................    30
    Prepared statement...........................................    32
Dalton, Patricia A., Managing Director, Physical Infrastructure 
  Issues, U.S. Government Accountability Office..................    12
    Prepared statement...........................................    14
Hamlen, Steve, President and CEO, United Utilities, Inc..........    36
    Prepared statement...........................................    37
Schlick, Austin C., Acting General Counsel, Federal 
  Communications Commission; accompanied by Lisa Gelb, Deputy 
  Chief, FCC's Wireline Competition Bureau.......................     4
    Prepared statement...........................................     6
Talbott, Brian L., Ph.D., Chairman of the Board, Universal 
  Service Administrative Company.................................     7
    Prepared statement...........................................     9

 
                   S. 241, PERMANENTLY EXEMPTING THE 
                      UNIVERSAL SERVICE FUND FROM 
                  PORTIONS OF THE ANTI-DEFICIENCY ACT

                              ----------                              

                         MONDAY, APRIL 11, 2005

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:05 p.m. in room 
SR-253, Russell Senate Office Building, Hon. Ted Stevens, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Good afternoon. We appreciate it if the 
witnesses could come forward. We are going to convene this 
hearing to examine Senate Bill 241, it's a bill to permanently 
exempt the Universal Service Fund from the Antideficiency Act.
    At the end of last season, Congress had to move quickly to 
pass a temporary 1-year exemption from the ADA to prevent 
further disruption to the E-rate program. And given that we 
only passed a temporary exemption last year, our Committee must 
now look at how we can permanently fix this problem.
    The witnesses are Austin Schlick, Acting General Counsel 
for the FCC, Lisa Gelb, for the FCC, Brian Talbott, Chairman of 
the Board of the Universal Service Administrative Company, 
Patricia Dalton, Managing Director of Physical Infrastructure 
Issues for the GAO, Sheryl Abshire, District Administrative 
Coordinator for Technology of, how do you say it, Calcasieu?
    Ms. Abshire. Calcasieu.
    Senator Stevens. Steve Hamlen, President and CEO, United 
Utilities.
    I should announce to you that in consideration of the 
supplemental appropriations bill that contains the Defense 
portion, primarily it's a Defense matter and when they call us, 
we are going to have to go, so we hope that we can move along 
quickly and get your statements.
    And we would ask you to summarize them if possible in the 
short period of time and we will print the full written 
statement into the record without objection and it would be our 
hope that we can discuss the issues that you will present to us 
as quickly as possible with our apologies due to the problems 
of that supplemental appropriations bill. Senator Inouye.

              STATEMENT OF HON. DANIEL K. INOUYE, 
                    U.S. SENATOR FROM HAWAII

    Senator Inouye. That's right, Mr. Chairman. I thank you for 
convening this hearing, and I'm also very pleased to advise you 
that I have co-sponsored this measure with you, Senators 
Rockefeller and Snowe. And I request that my full statement be 
part of the record.
    [The prepared statement of Senator Inouye follows:]

             Prepared Statement of Hon. Daniel K. Inouye, 
                        U.S. Senator from Hawaii

    Mr. Chairman, I want to thank you for holding this hearing to 
examine the need to exempt the Universal Service Fund from certain 
accounting provisions of the Antideficiency Act. I am pleased to 
cosponsor S. 241 with you, Senators Snowe and Rockefeller, and many 
others on this Committee.
    Schools, libraries and rural health care providers in all of our 
states rely on funding from the USF annually. My state of Hawaii alone 
has received over $27 million from the E-rate and Rural Health Care 
programs since they were created under the Telecommunications Act of 
1996.
    However, everyone on this Committee remembers very well the events 
of last year. While lawyers and policy makers in Washington argued 
about accounting rules and antideficiency requirements, schools, 
libraries and rural health care providers across the country were faced 
with the dilemma of shutting down or delaying deployment of innovative 
educational and medical services because of unreliable funding. For 
many people in the affected communities, losing access to these 
services would have meant losing opportunities to change, enrich, and 
improve their lives. With your leadership Mr. Chairman, a temporary fix 
was enacted during the closing days of session last Congress, but we 
must act now to ensure that future disruptions to these critical 
programs do not occur.
    I want to be clear. Congress must act to ensure that schools, 
libraries, and rural health care providers continue to receive this 
funding in a timely and predictable manner. I believe that enacting a 
permanent solution must be one of our highest priorites this session.
    Technology is transforming how we receive and share information, 
and in turn, it is empowering people to change their lives and the life 
of their communities. Access to the Internet is the encyclopedia of the 
twenty-first century, and I, for one, will not allow our young people 
to lose that access.
    I am pleased to hear from the panel of witnesses before us on the 
Universal Service Fund and the issues relating to the Antideficiency 
Act. However, it seems that we are missing a critical perspective at 
the table--the Office of Management and Budget, which has raised 
concerns with this legislation. We would like to have a full record and 
I am disappointed that OMB is depriving us of their important 
perspective on this matter.
    Mr. Chairman, this is a very serious matter and we must work hard 
to find a solution. I commit to working with you and our colleagues to 
move this legislation through the Congress. Thank you.

    Senator Stevens. Senator Rockefeller?

         STATEMENT OF THE HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. The same request, Mr. Chairman.
    [The prepared statement of Senator Rockefeller follows:]

          Prepared Statement of Hon. John D. Rockefeller IV, 
                    U.S. Senator from West Virginia

    Mr. Chairman, I deeply appreciate your cooperation in scheduling 
this hearing on the applicability of the Anti-deficiency Act to the 
Universal Service Fund. I would also like to thank you and Senator 
Inouye for your co-sponsorship of S. 241, Senator Snowe's and my bill 
to make permanent the exemption of Universal Service from the Anti-
deficiency Act. Our bill has bipartisan support with 29 cosponsors.
    I would note that this Committee has asked the Office of Management 
and Budget to appear to discuss their objections to this important 
legislation--they have declined to appear. I would also note that OMB 
has consistently refused to put in writing any objections they have.
    I find it highly inappropriate to have the Administration object to 
a bill without the courtesy of telling me why. I am deeply disappointed 
by the Administration's actions in this manner. OMB was the driver of 
many of the issues we are facing here today, and it is more than 
appropriate that they should be testifying to their thoughts on 
addressing these issues.
    The telecommunications, education, library, rural health, and 
consumer communities have also expressed strong support for this bill. 
It is my understanding that the Committee will soon mark-up this bill 
and I hope that we will be able to keep an accelerated schedule to 
adopt this bill. We need to act soon if to avoid the confusion and 
problems we experienced last year on Universal Service, particularly E-
rate and rural health care.
    Last year, the Office and Management and Budget and the Federal 
Communications Commission imposed accounting changes on the Universal 
Service Administrative Corporation (USAC)--the non-profit that 
administers the Universal Service Fund--resulting in the Anti-
deficiency Act applying to the USF.
    Because of these accounting changes, two of the four universal 
service programs were suspended for several months, creating enormous 
difficulties for thousands of schools and rural health care providers 
across the country. Some schools were forced to shut down their 
internet because they could not get funding from the E-rate programs. 
Because of our actions, we avoided a massive disruption in the 
operations of our nation's small rural telecommunications firms who are 
dependent on universal service funding to make sure they can connect 
their consumers to our nation's telecommunications network.
    On the last day of our session and do to the considerable efforts 
of Senator Stevens and Senator Burns, we secured an agreement on a 
telecommunications package that included a one-year exemption of the 
Anti-deficiency Act for all of Universal Service. Today's hearing will 
focus on S. 241, legislation to make the exemption permanent.
    Our legislation does nothing more than allow the Universal Service 
Fund to continue operating as it has since 1998. The benefits of this 
bill include:

        (1) Avoiding a massive funding disruption to schools, 
        libraries, and health providers this summer;

        (2) Preventing excessive spikes in the line-items on consumer 
        phone bills; and

        (3) Providing financial stability our small telecommunications 
        firms need.

    We all know that we need to thoroughly debate and decide on a more 
comprehensive approach to telecommunication policy, including financing 
of the Universal Service Fund. In my view, this will take time. This 
bill is unrelated to broader questions of the policies we must adopt to 
the Universal Service Fund in light of the telecommunications changes 
that have occurred in the last decade. The Anti-deficiency Act is an 
arcane budget policy we can address independently of other universal 
service fund issues.
    We all know that telecommunications has changed dramatically since 
enactment of the 1996 Act, and this Committee will examine what changes 
we need to make to that law. I know that Senator Stevens and Snowe and 
the other Members of this Committee are deeply aware of the fundamental 
importance of the four component Universal Service Funds--the High Cost 
Fund, the Low-Income Fund, the E-rate, and the Rural Health Fund. In 
1996, we agreed in our historic conference report that:

    ``. . . Universal service is an evolving level of 
telecommunications services that the Commission shall establish 
periodically under this section . . . the definition of the services 
that are supported by Federal universal service support mechanisms 
shall consider the extent to which such telecommunications services are 
essential to education, public health or public safety . . .''

    I still strongly believe in the principles of Universal Service, 
and I am confident that we can forge consensus among the 
telecommunications industry on ways to fulfill these continuing 
obligations are part of ongoing telecommunications reform.
    But knowing the power and importance of telecommunications in our 
economy we cannot let our rural areas, our low-income families, our 
school and libraries, or our rural health clinics be left out and 
isolated. These institutions cannot afford to have their universal 
service funding disrupted. We should enact our Anti-deficiency 
exemption as an interim step to safe guard all aspects of Universal 
Service.
    Again, I would like to thank the Committee's Co-Chairman--Senators 
Stevens and Inouye for all of their assistance with this legislation.

    Senator Stevens. Without objection, all statements are 
printed in the record, including those Senators that come in, 
if they wish to insert them. Let us start first with the Acting 
General Counsel of the FCC.

        STATEMENT OF AUSTIN C. SCHLICK, ACTING GENERAL 
          COUNSEL, FEDERAL COMMUNICATIONS COMMISSION; 
    ACCOMPANIED BY LISA GELB, DEPUTY CHIEF, FCC's WIRELINE 
                       COMPETITION BUREAU

    Mr. Schlick. Good afternoon. My name is Austin Schlick. I'm 
the Acting General Counsel for the Federal Communications 
Commission. Thank you for this opportunity to appear before you 
to discuss S. 241 and application of the Antideficiency Act to 
the Universal Service Fund. Appearing with me this afternoon is 
Lisa Gelb, Deputy Chief of the FCC's Wireline Competition 
Bureau. Ms. Gelb will address any questions you may have for 
the Commission about operational aspects of the Universal 
Service Fund.
    The Antideficiency Act prohibits government expenditures 
and obligations in excess of the amounts available in an 
appropriation, fund or apportionment. The central purpose of 
the Antideficiency Act is to prevent Federal agencies from 
incurring obligations that would require them to receive 
additional appropriations from Congress.
    The Universal Service Fund is funded by industry 
contributions, not Congressional appropriations. Nevertheless, 
the Antideficiency Act applies to the Universal Service Fund 
because the fund is recognized by OMB, CBO, and GAO as a 
permanent indefinite appropriation. In September 2004, the FCC 
concluded the Fund was operating in violation of the 
Antideficiency Act.
    The events that led the agency to that conclusion began in 
October 2003 when the Commission adopted a rule requiring USAC 
to account for the financial transactions of the Universal 
Service Fund in accordance with government accounting 
principles for Federal agencies, known as GovGAAP, beginning 
with fiscal year 2005. The decision to require USAC to adhere 
to GovGAAP for transactions of the Fund was based on the need 
to bring the FCC into compliance with statutory and OMB 
requirements for financial reporting.
    The transition to GovGAAP standards highlighted new 
accounting issues in the E-rate and rural health care programs. 
In those programs, USAC issues a funding commitment decision 
letter that notifies program applicants which specific services 
will be funded under the program and the amount of funding that 
will be provided.
    In the process of implementing GovGAAP, the question arose 
whether commitment letters issued by USAC constitute 
obligations for purposes of applying the Antideficiency Act. In 
addition, OMB informally advised the Commission and USAC the 
USF moneys that were invested in Federal securities might not 
be considered available reserves that could be used to offset 
obligations under the Antideficiency Act.
    In August of 2004, USAC suspended issuance of all 
commitment letters in the E-rate and rural healthcare programs 
until those questions were answered.
    In September of 2004, the Commission's Office of General 
Counsel concluded that the USAC commitment letters do 
constitute recordable obligations for purposes of applying the 
Antideficiency Act and USAC's non-Federal investments could not 
be treated as available funds.
    Both OMB and GAO have since rendered opinions agreeing with 
the FCC's application of the Antideficiency Act.
    On September 27, 2004, the FCC's managing director and 
chief of the FCC's Wireline Competition Bureau directed USAC to 
liquidate its non-Federal investments in order to have 
sufficient cash on hand to comply with the Antideficiency Act. 
The deficiency was cured as of September 30th, 2004.
    The FCC has also considered the application of the 
Antideficiency Act to the high cost and low income support 
mechanisms of the Universal Service Fund. In the high cost and 
low income support programs there is no specific obligational 
document equivalent to commitment letters in the E-rate 
program.
    Our tentative view is that obligations in these programs do 
not occur until USAC signs an internal disbursement 
authorization that determines the amounts each carrier should 
be paid for telephone services provided during the prior month.
    Assuming the Fund has adequate cash on hand to cover those 
disbursement decisions, operation of high cost and low income 
programs complies with the Antideficiency Act. Given the 
importance of the issue, however, the Commission has sought 
OMB's expert guidance.
    Enactment of Public Law 108-494 in December 2004 permitted 
the Fund, for 1 year, to incur obligations prior to receipt of 
cash to cover those obligations. The obligations incurred 
during the exemption period remain permanently exempt from the 
Antideficiency Act. As a result, during 2005 USAC may issue 
commitment letters in the E-rate program and rural health care 
program without having to have cash on hand at that time to 
cover the associated future disbursements.
    Because the current exemption expires at the end of 2005, 
the Commission is proceeding cautiously by protecting cash 
reserves in the Fund that may be needed for Antideficiency Act 
compliance in the future.
    First, on December 22nd, 2004, the FCC staff directed USAC 
not to shift funds out of the Federal investments that qualify 
as available amounts under the Antideficiency Act without prior 
approval. Second, on March 17th, 2005, the FCC staff directed 
USAC not to issue commitment letters for the E-rate and rural 
health care programs in amounts that exceed the annual 
disbursement caps established by the FCC.
    The determinations by the FCC, OMB and GAO that commitment 
letters constitute recordable obligations mean that as of 
January 1, 2006, the commitment letters may not be issued by 
USAC unless there is sufficient cash on hand to cover the 
obligations.
    S. 241, however, would make permanent the Fund's current 
exemption from the Antideficiency Act's restrictions on 
obligations in excess of available resources.
    Thank you for the opportunity to provide the Commission's 
views on the impact of the Antideficiency Act on the Universal 
Service Fund. Ms. Gelb and I will be happy to answer your 
questions.
    [The prepared statement of Mr. Schlick follows:]

   Prepared Statement of Austin C. Schlick, Acting General Counsel, 
                   Federal Communications Commission

    Good afternoon, Mr. Chairman, Senator Inouye, and distinguished 
Members of the Committee. Thank you for this opportunity to appear 
before you to discuss S. 241 and application of the Antideficiency Act 
to the Universal Service Fund (Fund). Appearing with me this afternoon 
is Lisa Gelb, Deputy Chief of the FCC's Wireline Competition Bureau. 
Ms. Gelb will address any questions you may have for the Commission 
about operational aspects of the Universal Service program.
    The Antideficiency Act prohibits government expenditures and 
obligations in excess of the amounts available in an appropriation, 
fund, or apportionment. The central purpose of the Antideficiency Act 
is to prevent federal agencies from incurring obligations that would 
require them to seek additional appropriations from Congress. The 
Universal Service Fund is funded by industry contributions, not 
congressional appropriations. Nevertheless, the Antideficiency Act 
applies to the Universal Service Fund because the Fund is recognized by 
the Office of Management and Budget (OMB), the Congressional Budget 
Office, and the Government Accountability Office (GAO) as a permanent 
indefinite appropriation. In September 2004, the FCC concluded that the 
Fund was operating in violation of the Antideficiency Act.
    The events that led the agency to that conclusion began in October 
2003, when the Commission adopted a rule requiring the Universal 
Service Administrative Company (USAC) to account for the financial 
transactions of the Universal Service Fund in accordance with 
government accounting principles for federal agencies, known as 
GovGAAP, beginning with Fiscal Year 2005. The decision to require USAC 
to adhere to GovGAAP for transactions of the Fund was based on the need 
to bring the FCC into compliance with statutory and OMB requirements 
for financial reporting for federal agencies and their programs.
    The transition to GovGAAP standards highlighted new accounting 
issues in the E-rate and rural health care programs. In those programs, 
USAC issues a Funding Commitment Decision Letter that notifies program 
applicants which specific services will be funded under the program and 
the amount of funding that will be provided. In the process of 
implementing GovGAAP, the question arose whether the Commitment Letters 
issued by USAC constituted ``obligations'' for purposes of applying the 
Antideficiency Act. In addition, OMB informally advised the Commission 
and USAC that USF monies that were invested in non-federal securities, 
as defined by OMB, might not be considered available reserves that 
could be used to offset obligations under the Antideficiency Act.
    In August 2004, USAC suspended issuance of all Commitment Letters 
in the E-rate and rural healthcare programs until these questions were 
answered. In September 2004, the Commission's Office of General Counsel 
concluded that the USAC Commitment Letters do constitute recordable 
obligations for purposes of applying the Antideficiency Act and USAC's 
non-federal investments could not be treated as available funds. Both 
OMB and GAO have since rendered opinions agreeing with the FCC General 
Counsel's conclusion.
    Based on those determinations, the Fund was being operated in 
violation of the Antideficiency Act because Commitment Letters in the 
E-rate and rural healthcare programs were issued at times when the Fund 
did not have sufficient cash available to cover those new obligations. 
On September 27, 2004, the FCC's Managing Director and the Chief of the 
FCC's Wireline Competition Bureau directed USAC to liquidate its non-
federal investments in order to have sufficient cash on hand to comply 
with the Antideficiency Act.
    The Commission has transmitted a report of this Antideficiency Act 
violation to the President and Congress, as required by statute. The 
FCC reported that on the last business day before the FCC directed USAC 
to liquidate its non-federal investments, the total outstanding program 
obligations of the Fund exceeded available budgetary resources by $3.5 
billion and exceeded OMB's initial FY 2004 apportionment for the Fund. 
The deficiency was cured as of September 30, 2004.
    The FCC has also considered the application of the Antideficiency 
Act to the High Cost and Low Income support mechanisms of the Universal 
Service Fund. In the High Cost and Low Income support programs, there 
is no specific obligational document equivalent to the Commitment 
Letters in the E-rate program. As a result, determining the time of 
obligation is more complex. At this point our tentative view is that 
obligations in these programs do not occur until USAC signs an internal 
disbursement authorization that determines the amounts each carrier 
should be paid for telephone services provided during the prior month. 
Assuming the Fund has adequate cash on hand to cover those disbursement 
decisions, operation of the High Cost and Low Income programs complies 
with the Antideficiency Act. Given the importance of the issue, 
however, the Commission has sought OMB's expert guidance.
    The passage of the Universal Service Antideficiency Temporary 
Suspension Act in December 2004 permitted the Fund, for one year, to 
incur obligations prior to the receipt of cash to cover those 
obligations without violating the Antideficiency Act. The obligations 
incurred during the exemption period remain permanently exempt from the 
Antideficiency Act. As a result, during 2005 USAC may issue Commitment 
Letters in the E-rate program and the rural healthcare program without 
having to have cash on hand at that time to cover the associated future 
disbursements.
    Because the current exemption expires at the end of 2005, the 
Commission is proceeding cautiously by protecting cash reserves in the 
Fund that may be needed for Antideficiency Act compliance in the 
future. First, on December 22, 2004, the FCC staff directed USAC not to 
shift funds out of federal investments that would qualify as available 
amounts under the Antideficiency Act, without prior approval. Second, 
on March 17, 2005, the FCC staff directed USAC not to issue Commitment 
Letters for the E-rate and rural healthcare programs in amounts that 
exceed the annual disbursement caps established by FCC rules.
    The determinations by the FCC, OMB, and GAO that Commitment Letters 
constitute recordable obligations mean that, as of January 1, 2006, 
Commitment Letters may not be issued by USAC unless there is sufficient 
cash on hand to cover the obligations. Further, if USF monies are 
invested in non-federal securities, those funds will not be available 
for obligation. S. 241, however, would make permanent the Fund's 
current exemption from the Antideficiency Act's restrictions on 
obligations in excess of available resources.
    Thank you for the opportunity to provide the Commission's views on 
the impact of the Antideficiency Act on the Universal Service Fund. Ms. 
Gelb and I will be happy to answer your questions.

    Senator Stevens. Ms. Gelb, do you have anything to add to 
that statement?
    Ms. Gelb. No, I don't, Senator.
    Senator Stevens. Mr. Talbott.

 STATEMENT OF BRIAN L. TALBOTT, Ph.D., CHAIRMAN OF THE BOARD, 
            UNIVERSAL SERVICE ADMINISTRATIVE COMPANY

    Mr. Talbott. Good afternoon, my name is Brian Talbott, 
Chairman of the Board of the Universal Service Administrative 
Company. It is my privilege to be here today to speak to you 
about USAC and its administration of the Universal Service 
Fund.
    The Fund provides approximately $6.5 billion annually to 
support access to telecommunications and other services by 
rural and low income consumers, schools, libraries, and rural 
health care providers. On behalf of all of the USF 
stakeholders, I would like to thank this Committee for its role 
in the passage of the Universal Service Antideficiency 
Temporary Suspension Act last September.
    USAC is a not-for-profit corporation designated by the FCC 
to administer the four universal service support mechanisms 
created by the Telecommunications Act of 1996. I have served on 
the board since USAC's creation in 1997, was elected chair in 
January of this year.
    From 1998 through 2004, USAC accounted for financial 
transactions and funding in accordance with GAAP. Generally, 
this approach was fully consistent with the FCC rules, and the 
extensive audits resulted in no material findings from 1998 
through 2003. In October 2003, the FCC ordered USAC to change 
our accounting methodology from GAAP to Federal Government 
accounting principles, GovGAAP.
    At the time, the USAC board understood from FCC staff that 
the transition to GovGAAP was necessitated by the fact that USF 
funds were a component of the FCC's financial statements and 
that this change would have no impact on the way USAC 
administers its programs.
    At the end of September 2004, late in the process of 
transitioning to GovGAAP, the FCC directed USAC to treat E-rate 
and rural health care under GovGAAP. This requirement 
fundamentally changed the manner in which USAC had administered 
the Fund since 1997.
    At the same time, FCC staff after consulting with OMB staff 
informed USAC for the first time that the Antideficiency Act 
applied to our funds. FCC staff further informed USAC that 
under GovGAAP, investments in government-backed mutual funds, 
government agency securities and money market funds were also 
considered obligations for government accounting purposes, and 
had to be liquidated to ensure compliance with ADA.
    USAC raised the question of whether high cost and low 
income projections also constitute obligations and USAC has not 
yet received an answer to that question. Application of ADA, 
combined with the accounting determination and E-rate and rural 
health care funding commitments constituting budgetary 
obligations had a number of dramatic consequences.
    USAC suspended new funding commitments for new funds 
leaving schools, libraries and rural health care providers 
without needed support.
    USAC was required to move more than $3 billion in safe 
government money market investments to Treasury securities 
resulting in a 4.6 million dollar loss to the fund.
    At the end of last year, Congress enacted the Universal 
Service Temporary Suspension Act and this allowed USAC to 
quickly resume its normal course of operations and begin 
issuing funding commitments. Many of the consequences 
experienced in 2004 could very well return upon expiration of 
the statute.
    The most serious occur if USAC is unable to make E-rate 
commitments at the start of the school year. This significant 
uncertainty for schools will adversely affect their planning 
processes. Rural health care providers already strapped for 
funds will have to wait even longer for funding required to 
serve critical patient medical needs.
    Because high cost support payments to rural telephone 
companies constitute a significant portion of their revenues, 
any suspension or delay in disbursements of funds may delay 
network maintenance or improvements. To the extent that USF 
investments are limited to Treasury securities, USAC's ability 
to use safe investments with higher yields to offset increases 
in the contribution factor will be severely limited. Investment 
returns help keep the contribution factor as low as possible.
    A decrease in income will increase the funding burden on 
all Americans. If the ADA is permanently applied to the Fund 
and high cost and low income projections are deemed to be 
budgetary obligations, a significant increase in the 
contribution factor could occur.
    The application of GovGAAP and ADA does not enhance USAC or 
the FCC's ability to address waste, fraud or abuse. USAC 
strongly supports the application of effective accounting rules 
for financial transactions. Accounting under GAAP between 1998 
and 2004, however, did not create the problems USAC has 
encountered under GovGAAP. USAC is committed to doing all it 
can to prevent waste, fraud and abuse and get substantial 
resources toward achieving that objective.
    None of the extensive measures that USAC takes to prevent 
waste, fraud and abuse are related to GovGAAP and the 
application of ADA to the Fund.
    Mr. Chairman, thank you for providing me with the 
opportunity to address the Committee. USAC looks forward to 
continuing our work with Congress and I would be happy to 
respond to any questions you may have.
    [The prepared statement of Mr. Talbott follows:]

 Prepared Statement of Brian L. Talbott, Ph.D., Chairman of the Board, 
                Universal Service Administrative Company

    Good afternoon, Mr. Chairman and Members of the Committee. My name 
is Brian Talbott. I am the Chairman of the Board of Directors of the 
Universal Service Administrative Company (USAC). It is my privilege to 
be here today to speak with you about USAC and its administration of 
the Universal Service Fund (USF). The USF provides approximately $6.5 
billion annually to support access to telecommunications and other 
services by rural and low-income consumers, schools, libraries and 
rural health care providers. On behalf of all USF stakeholders, I would 
like to thank this Committee for its role in the passage of the 
Universal Service Antideficiency Temporary Suspension Act last 
December. This Act provided much needed relief to schools, libraries, 
and rural health care providers, as well as to the companies serving 
them.
Overview
    USAC is the not-for-profit corporation designated by the Federal 
Communications Commission (FCC) to administer the High Cost, Low 
Income, Rural Health Care, and Schools and Libraries (E-rate) universal 
service support mechanisms created by the Telecommunications Act of 
1996 and FCC regulations adopted pursuant to the Act. USAC is governed 
by a Board of Directors, each of whom is appointed by the Chairman of 
the FCC. I have served on the Board since USAC's creation in 1997 and 
was elected Chairman in January 2005.

Application of Government Accounting Principles (GovGAAP) to the USF
    From 1998 through 2004, USAC, pursuant to FCC regulations, 
accounted for the financial transactions of the USF in accordance with 
Generally Accepted Accounting Principles (GAAP). The extensive annual 
audits conducted under strict FCC oversight as required by Part 54 of 
the FCC's rules resulted in no material findings from 1998 through 
2003. The 2004 audit has not yet been completed.
    In October 2003, the FCC ordered USAC to change the USF accounting 
methodology from GAAP to Federal Government accounting principles, or 
GovGAAP. The FCC stated that the purpose of moving the USF to GovGAAP 
was ``to ensure that the Commission can maintain its obligations under 
federal financial management and reporting statutes and directives of 
the Office of Management and Budget (OMB)'' because the USF is a 
component of the FCC's financial statement. At the time, the USAC Board 
understood from FCC staff that the transition to GovGAAP would have no 
impact on the manner in which USAC administers the programs themselves.
    Throughout the last quarter of 2003 and during 2004, USAC undertook 
the necessary steps to train our financial staff in and conform our 
systems to GovGAAP in order to meet the October 1, 2004 implementation 
deadline. As USAC worked with FCC staff to transition to GovGAAP, USAC 
staff raised the question whether GovGAAP should be interpreted to 
mandate treating commitment letters USAC sends to beneficiaries in the 
E-rate and Rural Health Care programs as ``obligations'' for purposes 
of government accounting. USAC staff raised a similar question as to 
the treatment of the projections USAC files with the FCC regarding High 
Cost and Low Income program payments.
    In late September 2004, USAC received the answer to one of these 
questions. FCC staff directed USAC to treat the E-rate and Rural Health 
Care commitment letters as government obligations. This new requirement 
fundamentally changed the manner in which USAC had administered the USF 
since 1997 in accordance with the Telecommunications Act of 1996, FCC 
regulations, close FCC oversight, and substantial audit review. With 
regard to the High Cost and Low Income program projections, USAC was 
informed that a request had been made to OMB for an opinion concerning 
whether those projections are government obligations as well. We have 
not received an answer to that question.
Impact of the Antideficiency Act on the USF
    During the process of transitioning to GovGAAP, USAC was verbally 
informed by FCC staff that the USF might be subject to the Federal 
Antideficiency Act (ADA). In late September 2004, FCC staff, after 
consulting with OMB, informed USAC for the first time that the ADA 
applied to the USF. At the same time, FCC staff informed USAC that 
under GovGAAP, USF investments in government-backed mutual funds, 
government agency securities, and money market funds were also 
considered ``obligations'' for government accounting purposes and had 
to be liquidated to ensure compliance with the ADA.
    Application of the ADA to the USF, combined with the accounting 
determination that E-rate and Rural Health Care funding commitments 
constitute budgetary obligations, had a number of dramatic 
consequences:

   Between August and November 2004, USAC suspended new funding 
        commitments in the E-rate and Rural Health Care programs, 
        leaving schools, libraries and rural health care providers 
        without needed support.

   Suspension of issuing commitments resulted in delays in 
        making the most effective use of services. For example, in one 
        case in Alaska, while the school district's service provider 
        continued to provide service under a multi-year contract 
        despite the lack of a commitment from USAC, the school board 
        became anxious that the amount of debt accumulating could lead 
        to bankruptcy. The district began to plan for the abrogation of 
        its contract and to turn off the services when it received a 
        commitment in January. In another case, a library would not 
        allow a service provider to proceed to install internal 
        connections without a commitment from USAC because the library 
        viewed the discounted share as an unfunded liability for which 
        the city could be sued.

   The late determination that the ADA applied to the USF 
        required USAC to move more than $3 billion in safe government-
        backed money market investments to Treasury securities, 
        resulting in a $4.6 million loss.

    Reapplication of the ADA to the USF will result in significant 
uncertainty and instability to the detriment of the USF and its many 
stakeholders. I will provide a few examples here:

   USAC makes commitments to schools for each school year under 
        FCC rules. If USAC is unable to make commitments before the 
        start of the school year, the significant uncertainty for the 
        schools will adversely affect their planning processes and 
        achievement of educational goals.

   Rural health care providers already strapped for funds will 
        have to wait even longer for funding required to serve critical 
        patient medical needs.

   Because High Cost support payments to rural telephone 
        companies in many cases constitute a significant portion of 
        their revenues, any suspension or delay in disbursement of 
        funds will disrupt their revenue flow and may delay network 
        maintenance and improvements.

   To the extent that USF investments are limited to Treasury 
        securities, USAC's ability to use safe investments with higher 
        yields to offset increases in the contribution factor will be 
        severely limited.

   If the ADA is permanently applied to the USF, and High Cost 
        and Low Income projections are deemed to be budgetary 
        obligations, a significant increase in the contribution factor 
        could occur.

   USAC will be required to keep separate accounts for monies 
        collected, committed and disbursed in 2005 for years to come if 
        a permanent exemption is not forthcoming. This increases 
        administrative costs and complexity. Because USAC's 
        administrative costs come from the USF, increasing 
        administrative costs in turn increases the burden on those who 
        contribute to the USF.

    Although USAC was able to make some limited E-rate commitments in 
November and December 2004, as the end of the year approached, USAC was 
holding back on issuing some $500 million in commitments due to a lack 
of unobligated monies as defined by GovGAAP and the application of the 
ADA to the USF. Then, at the end of last year, Congress enacted the 
Universal Service Antideficiency Temporary Suspension Act. This allowed 
USAC to quickly resume its normal course of operations and continue 
issuing funding commitments in the E-rate and Rural Health Care 
Programs. I would like to thank all of you for your leadership in that 
effort. The temporary exemption, which allows the USF to incur 
obligations for a limited period without regard to the ADA or the 
apportionment limitations otherwise imposed on the expenditure of 
federal appropriations, offers the USF some administrative relief for 
2005. Many of the deleterious consequences experienced in late 2004, 
however, could very well return upon expiration of the statute. 
Consequently, without a permanent exemption, there will be significant 
uncertainty as to how the universal service programs will operate in 
the future, which could lead to instability in the programs. We know 
that the unanticipated consequences of the changes mandated by GovGAAP 
and the application of the ADA to the USF created serious 
administrative issues that harmed the programs without evident 
benefits. USAC recognizes the need for appropriate mechanisms to ensure 
effective oversight of USF programs. Just as imposition of the ADA 
created damaging uncertainty in the administration of the USF programs, 
however, the rolling application of additional federal statutes and 
regulations to the USF and its administrative structure, without 
careful consideration of their need and their impact on the programs, 
could lead to similar difficulties.
Effect of the Application of the ADA on USF Investments
    The design of the universal service programs requires USAC to 
maintain a significant USF balance. Since its inception, USAC has 
managed the USF prudently, investing funds on hand in different safe 
vehicles, including government-backed mutual funds, government agency 
securities, and money market funds, all of which--despite their proven 
safety and high liquidity--are now considered budgetary obligations 
under GovGAAP. OMB rules mandate that in order for funds to be 
considered ``unobligated'' such funds must be invested only in United 
States Treasury securities or in cash.
    If the ADA applies to the USF as of January 1, 2006, USAC's ability 
to invest the USF in a manner that safely optimizes interest income 
will be severely curtailed, because investments in essentially anything 
other than cash and direct Treasury or federal agency instruments--no 
matter how safe or liquid--are considered ``obligations'' for purposes 
of GovGAAP accounting. At best, USAC might be able to invest a very 
small amount of the funds in accounts that would be considered 
obligated. Right now, all USF investments are in cash accounts or 
Treasury instruments.
    In three days last year, at the direction of FCC staff, USAC sold 
approximately $3 billion in safe investments and placed those funds in 
cash and Treasury instruments, resulting in a $4.6 million loss. This 
reallocation of the USF investment portfolio resulted in an immediate 
20 percent decrease in investment returns. That is, fourth quarter 2004 
interest income was $9.7 million, compared to $12 million in interest 
income in the third quarter of 2004. Because investment returns help 
keep the contribution factor as low as possible, a decrease in interest 
income will increase the funding burden on all Americans.

The Transition to GovGAAP and Application of the ADA to the USF Have No 
        Impact On USAC's Ability to Deter, Prevent, and Detect Waste, 
        Fraud, and Abuse and Are Not Required to Limit USF Expenditures
    Not only has the application of GovGAAP and the ADA to the USF 
created instability in the E-rate program, these measures do not 
enhance USAC's or the FCC's ability to address waste, fraud, or abuse 
of the USF. They are simply rules governing the accounting treatment of 
the USF. USAC strongly supports the application of effective accounting 
rules to the financial transactions of the USF. Accounting under GAAP 
between 1998 and 2004 did not have the effect of creating the 
collection and disbursement problems USAC has encountered under 
GovGAAP.
    USAC is committed to doing all it can to prevent waste, fraud, and 
abuse in the universal service support mechanisms and devotes 
substantial resources toward achieving that objective. Since it began 
administering the USF, USAC has denied millions of dollars in funding 
requests from ineligible entities and entities seeking ineligible 
services. None of the measures that USAC takes to prevent waste, fraud, 
and abuse--extensive data validation procedures, close scrutiny of 
invoices, and beneficiary audits, to name just a few examples--are 
related to GovGAAP or the application of the ADA to the USF.
    There may be some concern regarding whether application of the ADA 
to the USF is necessary to contain USF spending. The answer is no. 
There are extensive statutory and regulatory constraints on the USF and 
no issues regarding USF spending in excess of applicable laws have been 
raised. These constraints are unaffected by the ADA. Application of the 
ADA could, however, create unpredictability and uncertainty regarding 
the timing and amount of USF payments that beneficiaries could expect 
to receive.

Conclusion
    Mr. Chairman, thank you for providing me with the opportunity to 
address the Committee. On behalf of all of the many USF stakeholders, I 
again applaud the Congress for passage of the Universal Service 
Antideficiency Temporary Suspension Act last December, and USAC 
welcomes your consideration of a permanent ADA exemption for the 
reasons I have discussed. USAC looks forward to continuing to work with 
Congress and I would be happy to respond to any questions you may have.

    Senator Stevens. Thank you very much.
    Ms. Dalton. For the information of the Senators that have 
come and joined us, we have already agreed to put the 
statements in the record if you have any statements. Ms. 
Dalton.

 STATEMENT OF PATRICIA A. DALTON, MANAGING DIRECTOR, PHYSICAL 
            INFRASTRUCTURE ISSUES, U.S. GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Ms. Dalton. Thank you, Mr. Chairman, Members of the 
Committee. I appreciate the opportunity to come before you 
today to discuss the applicability of the Antideficiency Act to 
the federal E-rate program, which provides schools and 
libraries across the country with funding for 
telecommunications and Internet services. GAO recently released 
a report which examined the FCC's management and oversight of 
the E-rate program. This afternoon, I will briefly summarize 
our findings with regard to the FCC's application of various 
fiscal controls to the E-rate program--specifically, the 
Antideficiency Act.
    Appropriated funds are subject to a variety of statutory 
provisions, including the Antideficiency Act, which is the 
cornerstone of Congressional efforts to provide funds control 
for executive branch expenditures. The Act's primary purpose is 
to prevent the obligation or expenditure of funds in excess of 
amounts available in an appropriation or in advance of the 
appropriation of funds unless authorized by law. Thus the 
Antideficiency Act is a key statute for financial management 
and for protecting funds from fraud, waste and abuse.
    In 2000, the FCC concluded that the Universal Service Fund 
constitutes a permanent indefinite appropriation--that is, 
funding appropriated or authorized by law to be collected and 
available for specified purposes without further congressional 
action. We agree with the FCC's determination.
    In deciding that the Fund is a permanent indefinite 
appropriation, the FCC set in motion a chain of events 
involving the applicability of the Antideficiency Act which 
led, at one point, to the suspension of E-rate funding 
commitments to schools and libraries, and which culminated in 
action by Congress in December 2004 to grant the Universal 
Service Fund a temporary exemption from the Antideficiency Act.
    As detailed in our report, we agree with the FCC that, 
absent a statutory exemption, the Universal Service Fund is 
subject to the Antideficiency Act and the E-rate program's 
commitment decision letters constitute obligations for purposes 
of the Act. Additional issues, however, remain to be resolved 
by the FCC. These issues include whether other actions taken in 
the Universal Service program constitute obligations and the 
timing of and amounts of obligations that must be reported.
    As we point out in our report, the laws encompassing fiscal 
and accountability controls are not applied in isolation; 
rather, they are part of a framework that addresses issues of 
financial management and general management of Federal agencies 
and programs. Our report is critical of the FCC for addressing 
the applicability of statutes to the program on a case-by-case 
basis, as issues have arisen. This has put the FCC and the E-
rate program in a position of reacting to problems as they 
occur--as happened with the Antideficiency Act--rather than 
setting up an organization and internal controls designed to 
ensure compliance with applicable laws.
    Since we released our report, the FCC has contracted with 
NAPA, the National Academy of Public Administration, to study 
and explore alternative models to the current organizational 
and governance structure of the Universal Service Fund program. 
We believe this study will go a long way towards addressing the 
concerns outlined in our report.
    Because it is unknown at this time what changes to 
universal service, if any, may result from the NAPA study, and 
because we believe that a comprehensive assessment is needed to 
examine which Federal requirements, procedures and practices 
should apply to this program, it is our opinion that a 
permanent exemption from the Antideficiency Act should not be 
granted at this time. Instead, other options should be 
considered.
    One option would be for Congress to grant the Universal 
Service Fund a 2- or 3-year exemption from the Act. This option 
would allow time for NAPA to complete its study, report its 
findings to the FCC, and for Congress and the FCC to consider 
whether structural changes to the universal service program are 
called for. A comprehensive assessment should then be made to 
determine, based on the decisions concerning the structure of 
the program, which Federal requirements, policies and 
practices--including the Antideficiency Act--should apply to 
the Universal Service Fund and to any entities administering 
the program. It could at that time be determined whether a 
permanent and complete exemption from the Antideficiency Act is 
warranted.
    Alternatively, crafting a limited exemption to the 
Antideficiency Act or other financial management requirements 
may be more appropriate. Based on what was learned in 2004, a 
limited exemption would recognize the program's unique 
financial structure and provide flexibility in managing the 
program. For example, Congress could specify that the FCC can 
use certain receivables or assets as budgetary resources. It 
also could define how or when an obligation is recognized. Such 
an approach would target specific issues within the unique 
operation of the Fund and yet leave important financial 
controls in place.
    Thank you, Mr. Chairman. This concludes my opening 
statement. I'd be happy to respond to any questions.
    [The prepared statement of Ms. Dalton follows:]

 Prepared Statement of Patricia A. Dalton, Managing Director, Physical 
      Infrastructure Issues, U.S. Government Accountability Office

    Mr. Chairman, Mr. Co-Chairman, and Members of the Committee:
    We are pleased to be here to discuss the results of our recently 
completed review of the Federal Communications Commission's (FCC's) 
universal service program for schools and libraries and to discuss 
specifically the applicability of the Antideficiency Act to the 
program. As you know, the Telecommunications Act of 1996 expanded the 
concept of universal service to include assistance to schools and 
libraries in acquiring telecommunications and Internet services; the 
act charged FCC with establishing the universal service discount 
mechanism for eligible schools and libraries. The commission, in turn, 
created a large and ambitious program that became commonly known as the 
``E-rate'' program, and set the annual funding cap for the program at 
$2.25 billion. FCC designated the Universal Service Administrative 
Company (USAC), a private, not-for-profit corporation established under 
FCC's rules, to carry out the day-to-day operations of the E-rate 
program. FCC retains responsibility for overseeing the program's 
operations and ensuring compliance with the commission's rules.
    Since 1998, the E-rate program has committed more than $13 billion 
in funding to help schools and libraries across the nation acquire 
telecommunications and Internet services. Eligible schools and 
libraries can apply annually to receive support, which can be used for 
specific eligible services and equipment such as telephone services, 
Internet access services, and the installation of internal wiring and 
other related items. Recently, however, allegations have been made that 
some E-rate beneficiaries (schools and libraries) and service providers 
(e.g., telecommunications and network equipment companies) have 
fraudulently obtained, wasted, or abused E-rate funding. In May 2004, 
for example, one service provider involved in E-rate projects in 
several states pleaded guilty to bid rigging and wire fraud and agreed 
to pay more than $20 million in criminal fines, civil payments, and 
restitution.
    In February 2005, we issued a report on various aspects of the 
program. Specifically, we evaluated (1) the effect of the current 
structure of the E-rate program on FCC's management of the program, (2) 
FCC's development and use of performance goals and measures in managing 
the program, and (3) the effectiveness of FCC's oversight mechanisms--
rulemaking proceedings, beneficiary audits, and reviews of USAC 
decisions (appeals)--in managing the program.
    Our testimony today is based on this report, which contains a 
fuller discussion of the results of our review and recommendations for 
improving FCC's management and oversight of the E-rate program. \1\ In 
summary, we found the following:
---------------------------------------------------------------------------
    \1\ Telecommunications: Greater Involvement Needed by FCC in the 
Management and Oversight of the E-rate Program, GAO-05-151 (Washington, 
DC: Feb. 9, 2005). The report is available on GAO's Web site at 
www.gao.gov.

   FCC established E-rate as a multibillion-dollar program 
        operating under an organizational structure unusual to the 
        Federal Government, but never conducted a comprehensive 
        assessment to determine which federal requirements, policies, 
        and practices apply to the program, to the Universal Service 
        Administrative Company, and to the Universal Service Fund 
        itself. FCC has addressed these issues on a case-by-case basis, 
        but this has put FCC and the E-rate program in the position of 
        reacting to problems as they occur rather than setting up an 
        organization and internal controls designed to ensure 
---------------------------------------------------------------------------
        compliance with applicable laws.

   With regard to the Antideficiency Act, we agree with FCC's 
        conclusions that the Universal Service Fund is a permanent 
        indefinite appropriation, is subject to that act, and that the 
        issuance of E-rate funding commitment letters constitutes 
        obligations for purposes of the Act. We believe that Congress 
        should consider either granting the Universal Service Fund a 
        two- or three-year exemption from the Antideficiency Act or 
        crafting a limited exemption that would provide management 
        flexibility. For example, Congress could specify that FCC could 
        use certain receivables or assets as budgetary resources. These 
        more limited solutions would allow time for the National 
        Academy of Public Administration to complete its study of the 
        Universal Service Fund program and report its findings to FCC. 
        Congress and FCC could then comprehensively assess, based on 
        decisions concerning the structure of the program, which 
        federal requirements, policies, and practices should apply to 
        the fund and to any entities administering the program. It 
        could then be determined whether a permanent and complete 
        exemption from the Antideficiency Act is warranted.

   FCC has not developed meaningful performance goals and 
        measures for assessing and managing the program. As a result, 
        there is no way to tell whether the program has resulted in the 
        cost-effective deployment and use of advanced 
        telecommunications services for schools and libraries.

   FCC's program oversight mechanisms contain weaknesses that 
        limit FCC's management of the program and its ability to 
        understand the scope of waste, fraud, and abuse within the 
        program. For example, FCC's rulemakings have often lacked 
        specificity and have led to situations where important USAC 
        administrative procedures have been deemed unenforceable by 
        FCC. There is also a significant backlog of E-rate appeals that 
        adds uncertainty to the program and impacts beneficiaries.

    FCC has taken some important steps, particularly in recent months, 
to address some of the areas of concern discussed in our report. 
Nevertheless, we believe that FCC has not done enough to proactively 
manage and provide a framework of government accountability for the 
multibillion-dollar E-rate program. To address the management and 
oversight problems we have identified, we recommended in our report 
that the Chairman of FCC: (1) conduct and document a comprehensive 
assessment to determine whether all necessary government accountability 
requirements, policies, and practices have been applied and are fully 
in place to protect the E-rate program and universal service funding; 
(2) establish meaningful performance goals and measures for the E-rate 
program; and (3) develop a strategy for reducing the E-rate program's 
appeals backlog, including that adequate staffing resources are devoted 
to E-rate appeals.

Background
    The concept of ``universal service'' has traditionally meant 
providing residential telephone subscribers with nationwide access to 
basic telephone services at reasonable rates. The Telecommunications 
Act of 1996 broadened the scope of universal service to include, among 
other things, support for schools and libraries. The act instructed the 
commission to establish a universal service support mechanism to ensure 
that eligible schools and libraries have affordable access to and use 
of certain telecommunications services for educational purposes. \2\ In 
addition, Congress authorized FCC to ``establish competitively neutral 
rules to enhance, to the extent technically feasible and economically 
reasonable, access to advanced telecommunications and information 
services for all public and nonprofit elementary and secondary school 
classrooms . . . and libraries . . . '' \3\ Based on this direction, 
and following the recommendations of a Federal-State Joint Board on 
Universal Service, \4\ FCC established the schools and libraries 
universal service mechanism that is commonly referred to as the E-rate 
program. The program is funded through statutorily mandated payments by 
companies that provide interstate telecommunications services. \5\ Many 
of these companies, in turn, pass their contribution costs on to their 
subscribers through a line item on subscribers' phone bills. \6\ FCC 
capped funding for the E-rate program at $2.25 billion per year, 
although funding requests by schools and libraries can greatly exceed 
the cap. For example, schools and libraries requested more than $4.2 
billion in E-rate funding for the 2004 funding year.
---------------------------------------------------------------------------
    \2\ 47 U.S.C. Sec. 254(h)(1)(B).
    \3\ 47 U.S.C. Sec. 254(h)(2).
    \4\ The Federal-State Joint Board on Universal Service was 
established in March 1996 to make recommendations to implement the 
universal service provisions of the Telecommunications Act of 1996. The 
board is composed of FCC commissioners, state utility commissioners, 
and a consumer advocate representative.
    \5\ These companies include providers of local and long distance 
telephone services, wireless telephone services, paging services, and 
pay phone services. 47 CFR. Sec. 54.706. Along with the E-rate program, 
other universal service programs under the Universal Service Fund are 
the High Cost program, the Low Income program, and the Rural Health 
Care program. The High Cost program assists customers living in high-
cost, rural, or remote areas through financial support to telephone 
companies, thereby lowering rates for local and long distance service. 
The Low Income program assists qualifying low-income consumers through 
discounted installation and monthly telephone services and free toll 
limitation service. The Rural Health Care program assists health care 
providers located in rural areas through discounts for 
telecommunications services. These four programs are sometimes 
collectively referred to as the Universal Service Fund program. For 
more information on the various universal service programs, see GAO, 
Telecommunications: Federal and State Universal Service Programs and 
Challenges to Funding, GAO-02-187 (Washington, DC: Feb. 4, 2002).
    \6\ The line item is called various things by various companies, 
such as the ``federal universal service fee'' or the ``universal 
connectivity fee.'' Some companies do not separate out universal 
service costs as a line item, but instead just build it into their 
overall costs. Either way, consumers ultimately pay for the various 
universal service programs, including E-rate.
---------------------------------------------------------------------------
    In 1998, FCC appointed USAC as the program's permanent 
administrator, although FCC retains responsibility for overseeing the 
program's operations and ensuring compliance with the commission's 
rules. \7\ In response to congressional conference committee direction, 
\8\ FCC has specified that USAC ``may not make policy, interpret 
unclear provisions of the statute or rules, or interpret the intent of 
Congress.'' \9\ USAC is responsible for carrying out the program's day-
to-day operations, such as maintaining a Web site that contains program 
information and application procedures; answering inquiries from 
schools and libraries; processing and reviewing applications; making 
funding commitment decisions and issuing funding commitment letters; 
and collecting, managing, investing, and disbursing E-rate funds. FCC 
permits--and in fact relies on--USAC to establish administrative 
procedures that program participants are required to follow as they 
work through the application and funding process.
---------------------------------------------------------------------------
    \7\ USAC was established at the direction of FCC and operates under 
FCC's rules and policies.
    \8\ See S.1768, 105th Cong., Sec. 2004(b)(2)(A) (1998).
    \9\ 47 CFR Sec. 54.702(c).
---------------------------------------------------------------------------
    Under the E-rate program, eligible schools, libraries, and 
consortia that include eligible schools and libraries \10\ may receive 
discounts for eligible services. Eligible schools and libraries may 
apply annually to receive E-rate support. The program places schools 
and libraries into various discount categories, based on indicators of 
need, so that the school or library pays a percentage of the cost for 
the service and the E-rate program funds the remainder. E-rate 
discounts range from 20 percent to 90 percent. USAC reviews all of the 
applications and related forms and issues funding commitment decision 
letters. Generally, it is the service provider that seeks reimbursement 
from USAC for the discounted portion of the service rather than the 
school or library. \11\
---------------------------------------------------------------------------
    \10\ Eligibility of schools and libraries is defined at 47 U.S.C. 
Sec. 254. Generally, educational institutions that meet the definition 
of ``schools'' in the Elementary and Secondary Education Act of 1965 
are eligible to participate, as are libraries that are eligible to 
receive assistance from a state's library administrative agency under 
the Library Services and Technology Act. Examples of entities not 
eligible for support are home school programs, private vocational 
programs, and institutions of higher education. In addition, neither 
private schools with endowments of more than $50 million nor libraries 
whose budgets are part of a school's budget are eligible to 
participate. 20 U.S.C. Sec. 9122.
    \11\ The school or library could also pay the service provider in 
full and then seek reimbursement from USAC for the discount portion.
---------------------------------------------------------------------------
FCC Established an Unusual Program Structure without Comprehensively 
        Addressing the Applicability of Governmental Standards and 
        Fiscal Controls
    FCC established an unusual structure for the E-rate program but has 
never conducted a comprehensive assessment of which federal 
requirements, policies, and practices apply to the program, to USAC, or 
to the Universal Service Fund itself. FCC only recently began to 
address a few of these issues.
    The Telecommunications Act of 1996 neither specified how FCC was to 
administer universal service to schools and libraries nor prescribed 
the structure and legal parameters of the universal service mechanisms 
to be created. The Telecommunications Act required FCC to consider the 
recommendations of the Federal-State Joint Board on Universal Service 
and then to develop specific, predictable, and equitable support 
mechanisms. Using the broad language of the act, FCC crafted an 
ambitious program for schools and libraries--roughly analogous to a 
grant program--and gave the program a $2.25 billion annual funding cap. 
To carry out the day-to-day activities of the E-rate program, FCC 
relied on a structure it had used for other universal service programs 
in the past--a not-for-profit corporation established at FCC's 
direction that would operate under FCC oversight. However, the 
structure of the E-rate program is unusual in several respects compared 
with other federal programs:

   FCC appointed USAC as the permanent administrator of the 
        Universal Service Fund, \12\ and FCC's Chairman has final 
        approval over USAC's Board of Directors. USAC is responsible 
        for administering the program under FCC orders, rules, and 
        directives. However, USAC is not part of FCC or any other 
        government entity; it is not a government corporation 
        established by Congress; and no contract or memorandum of 
        understanding exists between FCC and USAC for the 
        administration of the E-rate program. Thus, USAC operates and 
        disburses funds under less explicit federal ties than many 
        other federal programs.

    \12\ USAC was appointed the permanent administrator subject to a 
review after one year by FCC to determine that the universal service 
programs were being administered in an efficient, effective, and 
competitively neutral manner. 47 CFR Sec. 54.701(a). This review was 
never conducted.
---------------------------------------------------------------------------
   Questions as to whether the monies in the Universal Service 
        Fund should be treated as federal funds have troubled the 
        program from the start. Even though the fund has been listed in 
        the budget of the United States and, since fiscal year 2004, 
        has been subject to an annual apportionment from OMB, the 
        monies are maintained outside of Treasury accounts by USAC and 
        some of the monies have been invested. \13\ The United States 
        Treasury implements the statutory controls and restrictions 
        involving the proper collection and deposit of appropriated 
        funds, including the financial accounting and reporting of all 
        receipts and disbursements, the security of appropriated funds, 
        and agencies' responsibilities for those funds. \14\

    \13\ The Universal Service Fund is included in the federal budget 
as a special fund. OMB concluded that the Fund does not constitute 
public money subject to the Miscellaneous Receipts Statute, 31 U.S.C. 
Sec. 3302, and therefore can be maintained outside the Treasury by a 
nongovernmental manager. Letter from Mr. Robert G. Damus, OMB General 
Counsel to Mr. Christopher Wright, FCC General Counsel, dated April 28, 
2000.
    \14\ See 31 U.S.C. Sec. Sec. 331, 3301-3305 and the Treasury 
Financial Manual, vol. I, which instructs federal agencies in areas of 
central accounting and reporting, disbursing, deposit regulations, and 
other fiscal matters necessary for the financial accounting and 
reporting of all receipts and disbursements of the Federal Government.

    As explained below, appropriated funds are subject, unless 
specifically exempted by law, to a variety of statutory controls and 
restrictions. These controls and restrictions, among other things, 
limit the purposes for which federal funds can be used and provide a 
scheme of accountability for federal monies. Key requirements are in 
Title 31 of the United States Code and the appropriate Treasury 
regulations, \15\ which govern fiscal activities relating to the 
management, collection, and distribution of public money.
---------------------------------------------------------------------------
    \15\ As set forth in part 31 of the Code of Federal Regulations or 
the Treasury Financial Manual.
---------------------------------------------------------------------------
    Since the inception of the E-rate program, FCC has struggled with 
identifying the nature of the Universal Service Fund and the 
managerial, fiscal, and accountability requirements that apply to the 
fund. FCC's Office of Inspector General first looked at the Universal 
Service Fund in 1999 as part of its audit of the commission's fiscal 
year 1999 financial statement because FCC had determined that the 
Universal Service Fund was a component of FCC for financial reporting 
purposes. During that audit, the FCC IG questioned commission staff 
regarding the nature of the fund and, specifically, whether it was 
subject to the statutory and regulatory requirements for federal funds. 
In the next year's audit, the FCC IG noted that the commission could 
not ensure that Universal Service Fund activities were in compliance 
with all laws and regulations because the issue of which laws and 
regulations were applicable to the fund was still unresolved at the end 
of the audit.
    FCC officials told us that the commission has substantially 
resolved the IG's concerns through recent orders, including FCC's 2003 
order that USAC begin preparing Universal Service Fund financial 
statements consistent with generally accepted accounting principles for 
federal agencies (GovGAAP) and keep the fund in accordance with the 
United States Government Standard General Ledger. While it is true that 
these steps and other FCC determinations discussed below should provide 
greater protections for universal service funding, FCC has addressed 
only a few of the issues that need to be resolved. In fact, staff from 
the FCC's IG's office told us that they do not believe the commission's 
GovGAAP order adequately addressed their concerns because the order did 
not comprehensively detail which fiscal requirements apply to the 
Universal Service Fund and which do not.

FCC's Decision on the Antideficiency Act Should Be Addressed in a 
        Broader Context
    FCC has made some determinations concerning the status of the 
Universal Service Fund and the fiscal controls that apply. For example, 
FCC has concluded that the Universal Service Fund is a permanent 
indefinite appropriation subject to the Antideficiency Act and that its 
issuance of funding commitment letters constitutes recordable 
obligations for purposes of the act. We agree with FCC's determinations 
on these issues, as explained in detail in appendix I. However, FCC's 
conclusions concerning the status of the Universal Service Fund raise 
further issues relating to the collection, deposit, obligation, and 
disbursement of those funds--issues that FCC needs to explore and 
resolve comprehensively rather than in an ad hoc fashion as problems 
arise.
    Status of funds as appropriated funds. In assessing the financial 
statement reporting requirements for FCC components in 2000, FCC 
concluded that the Universal Service Fund constitutes a permanent 
indefinite appropriation (i.e., funding appropriated or authorized by 
law to be collected and available for specified purposes without 
further congressional action). We agree with FCC's conclusion. 
Typically, Congress will use language of appropriation, such as that 
found in annual appropriations acts, to identify a fund or account as 
an appropriation and to authorize an agency to enter into obligations 
and make disbursements out of available funds. Congress, however, 
appropriates funds in a variety of ways other than in regular 
appropriations acts. Thus, a statute that contains a specific direction 
to pay and a designation of funds to be used constitutes an 
appropriation. \16\ In these statutes, Congress (1) authorizes the 
collection of fees and their deposit into a particular fund, and (2) 
makes the fund available for expenditure for a specified purpose 
without further action by Congress. This authority to obligate or 
expend collections without further congressional action constitutes a 
continuing appropriation or a permanent appropriation of the 
collections. \17\ Because the Universal Service Fund's current 
authority stems from a statutorily authorized collection of fees from 
telecommunications carriers and the expenditure of those fees for a 
specified purpose (that is, the various types of universal service), it 
meets both elements of the definition of a permanent appropriation.
---------------------------------------------------------------------------
    \16\ 63 Comp. Gen. 331 (1984); 13 Comp. Gen. 77 (1933).
    \17\ E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (DC Cir. 
1965), cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 262 
(1990); 73 Comp. Gen. 321 (1994).
---------------------------------------------------------------------------
    Decision regarding the Antideficiency Act. As noted above, in 
October 2003, FCC ordered USAC to prepare financial statements for the 
Universal Service Fund, as a component of FCC, consistent with GovGAAP, 
which FCC and USAC had not previously applied to the fund. In February 
2004, staff from USAC realized during contractor-provided training on 
GovGAAP procedures that the commitment letters sent to beneficiaries 
(notifying them whether or not their funding is approved and in what 
amount) might be viewed as ``obligations'' of appropriated funds. \18\ 
If so, and if FCC also found the Antideficiency Act--which does not 
allow an agency or program to make obligations in excess of available 
budgetary resources--to be applicable to the E-rate program, then USAC 
would need to dramatically increase the program's cash-on-hand and 
lessen the program's investments \19\ to provide budgetary authority 
sufficient to satisfy the Antideficiency Act. As a result, USAC 
suspended funding commitments in August 2004 while waiting for a 
commission decision on how to proceed. At the end of September 2004--
facing the end of the fiscal year--FCC decided that commitment letters 
were obligations, that the Antideficiency Act did apply to the program, 
and that USAC would need to immediately liquidate some of its 
investments to come into compliance with the Antideficiency Act. 
According to USAC officials, the liquidations cost the fund 
approximately $4.6 million in immediate losses and could potentially 
result in millions in foregone annual interest income.
---------------------------------------------------------------------------
    \18\ An ``obligation'' is an action that creates a legal liability 
or definite commitment on the part of the government to make a 
disbursement at some later date.
    \19\ According to USAC, the Universal Service Fund was invested in 
a variety of securities, including cash and cash equivalents, 
government and government-backed securities, and high-grade commercial 
paper. USAC generally did not seek the approval of the commission on 
particular investments, although investments were made with FCC 
knowledge and oversight through formal audits and informal meetings and 
review.
---------------------------------------------------------------------------
    FCC was slow to recognize and address the issue of the 
applicability of the Antideficiency Act, resulting in the abrupt 
decision to suspend funding commitment decision letters and liquidate 
investments. In response to these events, in December 2004, Congress 
passed a bill granting the Universal Service Fund a one-year exemption 
from the Antideficiency Act. \20\ Nevertheless, FCC's conclusion on 
this issue was correct: Absent a statutory exemption, the Universal 
Service Fund is subject to the Antideficiency Act, and its funding 
commitment decision letters constitute obligations for purposes of the 
act.
---------------------------------------------------------------------------
    \20\ Universal Service Antideficiency Temporary Suspension Act, 
Pub. L. No. 108-494, Sec. 302, 118 Stat. 3986 (2004). The law exempts 
universal service monies from the Antideficiency Act until December 31, 
2005.
---------------------------------------------------------------------------
    The Antideficiency Act applies to ``official[s] or employee[s] of 
the United States Government . . . mak[ing] or authorizing an 
expenditure or obligation . . . from an appropriation or fund.'' 31 
U.S.C. Sec. 1341(a). As discussed above, the Universal Service Fund is 
an ``appropriation or fund.'' Even though USAC--a private entity whose 
employees are not federal officers or employees--is the administrator 
of the program and the entity that obligates and disburses money from 
the fund, application of the act is not negated. This is because, as 
recognized by FCC, it, and not USAC, is the entity that is legally 
responsible for the management and oversight of the E-rate program and 
because FCC's employees are federal officers and employees of the 
United States subject to the Antideficiency Act. Thus, the Universal 
Service Fund will again be subject to the Antideficiency Act when the 
one-year statutory exemption expires, unless action is taken to extend 
or make permanent the exemption.
    An important issue that arises from the application of the 
Antideficiency Act to the Universal Service Fund is what actions 
constitute obligations chargeable against the fund. Under the 
Antideficiency Act, an agency may not incur an obligation in excess of 
the amount available to it in an appropriation or fund. Thus, proper 
recording of obligations with respect to the timing and amount of such 
obligations permits compliance with the Antideficiency Act by ensuring 
that agencies have adequate budget authority to cover all of their 
obligations. Our decisions have defined an ``obligation'' as a 
commitment creating a legal liability of the government, including a 
``legal duty . . . which could mature into a liability by virtue of 
actions on the part of the other party beyond the control of the United 
States . . . '' \21\
---------------------------------------------------------------------------
    \21\ See B-300480, April 9, 2003.
---------------------------------------------------------------------------
    With respect to the Universal Service Fund, the funding commitment 
decision letter provides the school or library with the authority to 
obtain services from a provider with the commitment that the school or 
library will receive a discount and the service provider will be paid 
for the discounted portion with E-rate funding. Although the school or 
library could decide not to seek the services or the discount, so long 
as the funding commitment decision letter remains valid and 
outstanding, USAC and FCC no longer control the Universal Service 
Fund's liability; it is dependent on the actions taken by the school or 
library. Consequently, we agree with FCC that a recordable obligation 
is incurred at the time of issuance of the funding commitment decision 
letter indicating approval of the applicant's discount.
    Additional issues that remain to be resolved by FCC include whether 
other actions taken in the Universal Service Fund program constitute 
obligations and the timing and amounts of obligations that must be 
recorded. For example, this includes the projections and data 
submissions by USAC to FCC and by participants in the High Cost and Low 
Income support mechanisms to USAC. FCC has indicated that it is 
considering this issue and consulting with the Office of Management and 
Budget. FCC should also identify any other actions that may constitute 
recordable obligations and ensure that those are properly recorded.
    While we agree with FCC's determinations that the Universal Service 
Fund is a permanent appropriation subject to the Antideficiency Act and 
that its funding commitment decision letters constitute recordable 
obligations of the Universal Service Fund (see app. I), there are 
several significant fiscal law issues that remain unresolved. We 
believe that where FCC has determined that fiscal controls and policies 
do not apply, the commission should reconsider these determinations in 
light of the status of universal service monies as federal funds. For 
example, in view of its determination that the fund constitutes an 
appropriation, FCC needs to reconsider the applicability of the 
Miscellaneous Receipts Statue, 31 U.S.C. Sec. 3302, which requires that 
money received for the use of the United States be deposited in the 
Treasury unless otherwise authorized by law. \22\ FCC also needs to 
assess the applicability of other fiscal control and accountability 
statutes (e.g., the Single Audit Act and the Cash Management 
Improvement Act). \23\
---------------------------------------------------------------------------
    \22\ Because OMB and FCC had believed the funds were not public 
monies ``for the use of the United States'' under the Miscellaneous 
Receipts Statute, neither OMB nor FCC viewed the Universal Service Fund 
as subject to that statute.
    \23\ For example, in October 2003, when the FCC ordered USAC to 
comply with GovGAAP, it noted that the Universal Service Fund was 
subject to the Debt Collection Improvement Act of 1996. In that same 
order, FCC stated that ``the funds may be subject to a number of 
federal financial and reporting statutes'' (emphasis added) and 
``relevant portions of the Federal Financial Management Improvement Act 
of 1996,'' but did not specify which specific statutes or the relevant 
portions or further analyze their applicability. FCC officials also 
told us that it was uncertain whether procurement requirements such as 
the Federal Acquisition Regulation (FAR) applied to arrangements 
between FCC and USAC, but they recommended that those requirements be 
followed as a matter of policy.
---------------------------------------------------------------------------
    Another major issue that remains to be resolved involves the extent 
to which FCC has delegated some functions for the E-rate program to 
USAC. For example, are the disbursement policies and practices for the 
E-rate program consistent with statutory and regulatory requirements 
for the disbursement of public funds? \24\ Are some of the functions 
carried out by USAC, even though they have been characterized as 
administrative or ministerial, arguably inherently governmental 
activities \25\ that must be performed by government personnel? 
Resolving these issues in a comprehensive fashion, rather than 
continuing to rely on reactive, case-by-case determinations, is key to 
ensuring that FCC establishes the proper foundation of government 
accountability standards and safeguards for the E-rate program and the 
Universal Service Fund.
---------------------------------------------------------------------------
    \24\ See 31 U.S.C. Sec. Sec. 3321, 3322, 3325, and the Treasury 
Financial Manual.
    \25\ See OMB Circular A-76, May 29, 2003, which defines an 
inherently governmental activity as requiring ``the exercise of 
substantial discretion in applying government authority and/or in 
making decisions for the government.'' OMB Cir. A-76, Attachment A. 
Inherently governmental activities include the establishment of 
procedures and processes related to the oversight of monetary 
transactions or entitlements. OMB Circular A-76 further states that 
``[e]xerting ultimate control over the acquisition, use or disposition 
of United States government property . . . including establishing 
policies or procedures for the collection, control, or disbursement of 
appropriated and other federal funds'' involves an inherently 
governmental activity.
---------------------------------------------------------------------------
    We are encouraged that FCC recently announced that it has 
contracted with the National Academy of Public Administration (NAPA) 
for NAPA to study the administration of the Universal Service Fund. 
NAPA will review the current status of the Universal Service Fund 
program as well as other similar governmental and quasi-governmental 
programs. Among other things, NAPA is to examine the pros and cons of 
continuing with the program's current structure or switching to an 
alternative model. NAPA is also to identify specific ways to improve 
the oversight and operation of the program, as well as any legislative 
or rule changes that would be needed to implement its recommendations. 
In addition, the review will identify internal controls in typical 
federal grant or subsidy programs that are not present in the Universal 
Service Fund program and determine whether the manner in which other 
analogous programs handle the holding, investment, and monitoring of 
program funds offers models for improving the operation of the 
Universal Service Fund.
    We believe that NAPA's study will go a long way toward addressing 
the concerns outlined in our report, and we look forward to seeing the 
results of NAPA's efforts. Given this important ongoing study and the 
unresolved issues mentioned previously, Congress may wish to consider 
deferring a decision on permanently exempting the Universal Service 
Fund from the Antideficiency Act at this time and instead consider 
either granting the fund a two- or three-year exemption from the 
Antideficiency Act or crafting a limited exemption that would provide 
management flexibility. For example, Congress could specify that FCC 
could use certain receivables or assets as budgetary resources. These 
more limited solutions would allow time for the National Academy of 
Public Administration to complete its study of the Universal Service 
Fund program and report its findings to FCC. Congress and FCC could 
then comprehensively assess, based on decisions concerning the 
structure of the program, which federal requirements, policies, and 
practices should apply to the fund and to any entities administering 
the program. It could then be determined whether a permanent and 
complete exemption from the Antideficiency Act is warranted.

FCC Did Not Develop Useful Performance Goals and Measures for 
        Assessing and Managing the E-rate Program
    Although $13 billion in E-rate funding has been committed to 
beneficiaries during the past 7 years, FCC did not develop useful 
performance goals and measures to assess the specific impact of these 
funds on schools' and libraries' Internet access and to improve the 
management of the program, despite a recommendation by us in 1998 to do 
so. At the time of our current review, FCC staff was considering, but 
had not yet finalized, new E-rate goals and measures in response to 
OMB's concerns about this deficiency in a 2003 OMB assessment of the 
program.
    One of the management tasks facing FCC is to establish strategic 
goals for the E-rate program, as well as annual goals linked to them. 
The Telecommunications Act of 1996 did not include specific goals for 
supporting schools and libraries, but instead used general language 
directing FCC to establish competitively neutral rules for enhancing 
access to advanced telecommunications and information services for all 
public and nonprofit private elementary and secondary school classrooms 
and libraries. \26\ As the agency accountable for the E-rate program, 
FCC is responsible under the Government Performance and Results Act of 
1993 (Results Act) for establishing the program's long-term strategic 
goals and annual goals, measuring its own performance in meeting these 
goals, and reporting publicly on how well it is doing. \27\
---------------------------------------------------------------------------
    \26\ 47 U.S.C. Sec. 254(h)(2)(A).
    \27\ For additional details on the Results Act and its 
requirements, see GAO, Executive Guide: Effectively Implementing the 
Government Performance and Results Act, GAO/GGD-96-118 (Washington, DC: 
June 1996). GAO first noted the lack of clear and specific E-rate 
performance goals and measures in its July 1998 testimony before the 
Senate Committee on Commerce, Science, and Transportation. See GAO, 
Schools and Libraries Corporation: Actions Needed to Strengthen Program 
Integrity Operations before Committing Funds, GAO/T-RCED-98-243 
(Washington, DC: July 16, 1998), pp. 15-16.
---------------------------------------------------------------------------
     For fiscal years 2000 through 2002, FCC's goals focused on 
achieving certain percentage levels of Internet connectivity during a 
given fiscal year for schools, public school instructional classrooms, 
and libraries. However, the data that FCC used to report on its 
progress was limited to public schools (thereby excluding two other 
major groups of beneficiaries--private schools and libraries) and did 
not isolate the impact of E-rate funding from other sources of funding, 
such as state and local government. This is a significant measurement 
problem because, over the years, the demand for internal connections 
funding by applicants has exceeded the E-rate funds available for this 
purpose by billions of dollars. Unsuccessful applicants had to rely on 
other sources of support to meet their internal connection needs. Even 
with these E-rate funding limitations, there has been significant 
growth in Internet access for public schools since the program issued 
its first funding commitments in late 1998. At the time, according to 
data from the Department of Education's National Center for Educational 
Statistics (NCES), 89 percent of all public schools and 51 percent of 
public school instructional classrooms already had Internet access. By 
2002, 99 percent of public schools and 92 percent of public school 
instructional classrooms had Internet access. \28\ Yet although 
billions of dollars in E-rate funds have been committed since 1998, 
adequate program data was not developed to answer a fundamental 
performance question: How much of the increase since 1998 in public 
schools' Internet access has been a result of the E-rate program, as 
opposed to other sources of federal, state, local, and private funding?
---------------------------------------------------------------------------
    \28\ See NCES, Internet Access in U.S. Public Schools and 
Classrooms: 1994-2002, NCES-2004-011 (Washington, DC; October 2003). 
This was the most recent update available at the time of our review.
---------------------------------------------------------------------------
    Performance goals and measures are used not only to assess a 
program's impact but also to develop strategies for resolving mission-
critical management problems. However, management-oriented goals have 
not been a feature of FCC's performance plans, despite long-standing 
concerns about the program's effectiveness in key areas. For example, 
two such goals--related to assessing how well the program's competitive 
bidding process was working and increasing program participation by 
low-income and rural school districts and rural libraries--were planned 
but not carried forward.
    FCC did not include any E-rate goals for fiscal years 2003 and 2004 
in its recent annual performance reports. The failure to measure 
effectively the program's impact on public and private schools and 
libraries over the past 7 years undercuts one of the fundamental 
purposes of the Results Act: to have federal agencies adopt a fact-
based, businesslike framework for program management and 
accountability. The problem is not just a lack of data for accurately 
characterizing program results in terms of increasing Internet access. 
Other basic questions about the E-rate program also become more 
difficult to address, such as the program's efficiency and cost-
effectiveness in supporting the telecommunications needs of schools and 
libraries. For example, a review of the program by OMB in 2003 
concluded that there was no way to tell whether the program has 
resulted in the cost-effective deployment and use of advanced 
telecommunications services for schools and libraries. \29\ OMB also 
noted that there was little oversight to ensure that the program 
beneficiaries were using the funding appropriately and effectively. In 
response to these concerns, FCC staff have been working on developing 
new performance goals and measures for the E-rate program and plan to 
finalize them and seek OMB approval in fiscal year 2005.
---------------------------------------------------------------------------
    \29\ OMB reviewed E-rate using its Program Assessment Rating Tool 
(PART), which is a diagnostic tool intended to provide a consistent 
approach to evaluating federal programs as part of the executive budget 
formulation process.
---------------------------------------------------------------------------
FCC's Oversight Mechanisms Are Not Fully Effective in Managing the 
        E-rate Program
    FCC testified before Congress in June 2004 that it relies on three 
chief components in overseeing the E-rate program: rulemaking 
proceedings, beneficiary audits, and fact-specific adjudicatory 
decisions (i.e., appeals decisions). We found weaknesses with FCC's 
implementation of each of these mechanisms, limiting the effectiveness 
of FCC's oversight of the program and the enforcement of program 
procedures to guard against waste, fraud, and abuse of E-rate funding.

FCC's Rulemakings Have Led to Problems with USAC's Procedures and 
        Enforcement of Those Procedures
    As part of its oversight of the E-rate program, FCC is responsible 
for establishing new rules and policies for the program or making 
changes to existing rules, as well as providing the detailed guidance 
that USAC requires to effectively administer the program. FCC carries 
out this responsibility through its rulemaking process. FCC's E-rate 
rulemakings, however, have often been broadly worded and lacking 
specificity. Thus, USAC has needed to craft the more detailed 
administrative procedures necessary to implement the rules. However, in 
crafting administrative procedures, USAC is strictly prohibited under 
FCC rules from making policy, interpreting unclear provisions of the 
statute or rules, or interpreting the intent of Congress. We were told 
by FCC and USAC officials that USAC does not put procedures in place 
without some level of FCC approval. We were also told that this 
approval is sometimes informal, such as e-mail exchanges or telephone 
conversations between FCC and USAC staff. This approval can come in 
more formal ways as well, such as when the commission expressly 
endorses USAC operating procedures in commission orders or codifies 
USAC procedures into FCC's rules. However, two problems have arisen 
with USAC administrative procedures.
    First, although USAC is prohibited under FCC rules from making 
policy, some USAC procedures deal with more than just ministerial 
details and arguably rise to the level of policy decisions. For 
example, in June 2004, USAC was able to identify at least a dozen 
administrative procedures that, if violated by the applicant, would 
lead to complete or partial denial of the funding request even though 
there was no precisely corresponding FCC rule. The critical nature of 
USAC's administrative procedures is further illustrated by FCC's 
repeated codification of them throughout the history of the program. 
FCC's codification of USAC procedures--after those procedures have been 
put in place and applied to program participants--raises concerns about 
whether these procedures are more than ministerial and are, in fact, 
policy changes that should be coming from FCC in the first place. 
Moreover, in its August 2004 order (in a section dealing with the 
resolution of audit findings), the commission directs USAC to annually 
``identify any USAC administrative procedures that should be codified 
in our rules to facilitate program oversight.'' This process begs the 
question of which entity is really establishing the rules of the E-rate 
program and raises concerns about the depth of involvement by FCC staff 
with the management of the program.
    Second, even though USAC procedures are issued with some degree of 
FCC approval, enforcement problems could arise when audits uncover 
violations of USAC procedures by beneficiaries or service providers. 
The FCC IG has expressed concern over situations where USAC 
administrative procedures have not been formally codified because 
commission staff have stated that, in such situations, there is 
generally no legal basis to recover funds from applicants that failed 
to comply with the USAC procedures. In its August 2004 order, the 
commission attempted to clarify the rules of the program with relation 
to recovery of funds. However, even under the August 2004 order, the 
commission did not clearly address the treatment of beneficiaries who 
violate a USAC administrative procedure that has not been codified.

FCC Has Been Slow to Address Problems Raised by Audit Findings
    FCC's use of beneficiary audits as an oversight mechanism has also 
had weaknesses, although FCC and USAC are now working to address some 
of these weaknesses. Since 2000, there have been 122 beneficiary audits 
conducted by outside firms, 57 by USAC staff, and 14 by the FCC IG (two 
of which were performed under agreement with the Inspector General of 
the Department of the Interior). Beneficiary audits are the most robust 
mechanism available to the commission in the oversight of the E-rate 
program, yet FCC generally has been slow to respond to audit findings 
and has not made full use of the audit findings as a means to 
understand and resolve problems within the program.
    First, audit findings can indicate that a beneficiary or service 
provider has violated existing E-rate program rules. In these cases, 
USAC or FCC can seek recovery of E-rate funds, if justified. \30\ In 
the FCC IG's May 2004 Semiannual Report, however, the IG observes that 
audit findings are not being addressed in a timely manner and that, as 
a result, timely action is not being taken to recover inappropriately 
disbursed funds. \31\ The IG notes that in some cases the delay is 
caused by USAC and, in other cases, the delay is caused because USAC is 
not receiving timely guidance from the commission (USAC must seek 
guidance from the commission when an audit finding is not a clear 
violation of an FCC rule or when policy questions are raised). 
Regardless, the recovery of inappropriately disbursed funds is 
important to the integrity of the program and needs to occur in a 
timely fashion.
---------------------------------------------------------------------------
    \30\ USAC, through its duties as administrator of the fund, 
initially seeks recovery of erroneously disbursed funds. In addition, 
the commission adopted rules in April 2003 to provide for suspension 
and debarment from the program for persons convicted of criminal 
violations or held civilly liable for certain acts arising from their 
E-rate participation. Debarments would be for a period of three years 
unless circumstances warrant a longer debarment period in order to 
protect the public interest.
    \31\ See FCC, Office of the Inspector General Semiannual Report to 
Congress, October 1, 2003-March 31, 2004 (Washington, DC; May 3, 2004).
---------------------------------------------------------------------------
    Second, under GAO's Standards for Internal Controls in the Federal 
Government, \32\ agencies are responsible for promptly reviewing and 
evaluating findings from audits, including taking action to correct a 
deficiency or taking advantage of the opportunity for improvement. 
Thus, if an audit shows a problem but no actual rule violation, FCC 
should be examining why the problem arose and determining if a rule 
change is needed to address the problem (or perhaps simply addressing 
the problem through a clarification to applicant instructions or 
forms). FCC has been slow, however, to use audit findings to make 
programmatic changes. For example, several important audit findings 
from the 1998 program year were only recently resolved by an FCC 
rulemaking in August 2004.
---------------------------------------------------------------------------
    \32\ GAO/AIMD-00-21.3.1.
---------------------------------------------------------------------------
    In its August 2004 order, the commission concluded that a 
standardized, uniform process for resolving audit findings was 
necessary, and directed USAC to submit to FCC a proposal for resolving 
audit findings. FCC also instructed USAC to specify deadlines in its 
proposal ``to ensure audit findings are resolved in a timely manner.'' 
\33\ USAC submitted its Proposed Audit Resolution Plan to FCC on 
October 28, 2004. The plan memorializes much of the current audit 
process and provides deadlines for the various stages of the audit 
process. FCC released the proposed audit plan for public comment in 
December 2004. \34\
---------------------------------------------------------------------------
    \33\ FCC, Fifth Report and Order, In the Matter of Schools and 
Libraries Universal Service Support Mechanism, FCC-04-190 (Washington, 
DC; Aug. 13, 2004), para. 74.
    \34\ Comments were due January 5, 2005; reply comments were due 
January 20, 2005.
---------------------------------------------------------------------------
    In addition to the Proposed Audit Resolution Plan, the commission 
instructed USAC to submit a report to FCC on a semiannual basis 
summarizing the status of all outstanding audit findings. The 
commission also stated that it expects USAC to identify for commission 
consideration on at least an annual basis all audit findings raising 
management concerns that are not addressed by existing FCC rules. 
Lastly, the commission took the unusual step of providing a limited 
delegation to the Wireline Competition Bureau (the bureau within FCC 
with the greatest share of the responsibility for managing the E-rate 
program) to address audit findings and to act on requests for waiver of 
rules warranting recovery of funds. \35\ These actions could help 
ensure, on a prospective basis, that audit findings are more thoroughly 
and quickly addressed. However, much still depends on timely action 
being taken by FCC, particularly if audit findings suggest the need for 
a rulemaking.
---------------------------------------------------------------------------
    \35\ FCC 04-190, para. 75.
---------------------------------------------------------------------------
    In addition to problems with responding to audit findings, the 
audits conducted to date have been of limited use because neither FCC 
nor USAC have conducted an audit effort using a statistical approach 
that would allow them to project the audit results to all E-rate 
beneficiaries. Thus, at present, no one involved with the E-rate 
program has a basis for making a definitive statement about the amount 
of waste, fraud, and abuse in the program. \36\ Of the various groups 
of beneficiary audits conducted to date, all were of insufficient size 
and design to analyze the amount of fraud or waste in the program or 
the number of times that any particular problem might be occurring 
programwide. At the time we concluded our review, FCC and USAC were in 
the process of soliciting and reviewing responses to a Request for 
Proposal for audit services to conduct additional beneficiary audits.
---------------------------------------------------------------------------
    \36\ In testimony before the House Subcommittee on Oversight and 
Investigations of the Committee on Energy and Commerce in June 2004, 
FCC's Inspector General submitted a prepared statement that said the 
``results of audits that have been performed and the allegations under 
investigation lead us to believe the program may be subject to 
unacceptably high risk of fraud, waste and abuse.'' At the same 
hearing, the Chief of FCC's Office of Strategic Planning and Policy 
Analysis and the Deputy Chief of FCC's Wireline Competition Bureau 
submitted a prepared statement that said that FCC had ``enabled 
implementation of the [E-rate] statutory goals with a minimum of fraud, 
waste, and abuse.''
---------------------------------------------------------------------------
FCC Has Been Slow to Act on Some E-rate Appeals
    Under FCC's rules, program participants can seek review of USAC's 
decisions, \37\ although FCC's appeals process for the E-rate program 
has been slow in some cases. Because appeals decisions are used as 
precedent, this slowness adds uncertainty to the program and impacts 
beneficiaries. FCC rules state that FCC is to decide appeals within 90 
days, although FCC can extend this period. At the time of our review 
there was a substantial appeals backlog at FCC (i.e., appeals pending 
for longer than 90 days). Out of 1,865 appeals to FCC from 1998 through 
the end of 2004, approximately 527 appeals remain undecided, of which 
458 (25 percent) are backlog appeals. \38\
---------------------------------------------------------------------------
    \37\ Virtually all of the decisions made by FCC and USAC in their 
management and administration of the E-rate program may be subject to 
petition for reconsideration or appeal by beneficiaries. Moreover, 
schools and libraries have the option of multiple appeal levels, 
including USAC, the Wireline Competition Bureau, and the commission.
    \38\ The bulk of the appeals are to USAC, which received a total of 
16,782 appeals from the beginning of the program through 2003. Of 
these, 646--roughly 4 percent--remained undecided as of September 20, 
2004.
---------------------------------------------------------------------------
    We were told by FCC officials that some of the backlog is due to 
staffing issues. FCC officials said they do not have enough staff to 
handle appeals in a timely manner. FCC officials also noted that there 
has been frequent staff turnover within the E-rate program, which adds 
some delay to appeals decisions because new staff necessarily take time 
to learn about the program and the issues. Additionally, we were told 
that another factor contributing to the backlog is that the appeals 
have become more complicated as the program has matured. Lastly, some 
appeals may be tied up if the issue is currently in the rulemaking 
process.
    The appeals backlog is of particular concern given that the E-rate 
program is a technology program. An applicant who appeals a funding 
denial and works through the process to achieve a reversal and funding 
two years later might have ultimately won funding for outdated 
technology. FCC officials told us that they are working to resolve all 
backlogged E-rate appeals by the end of calendar year 2005.

Summary
    In summary, we remain concerned that FCC has not done enough to 
proactively manage and provide a framework of government accountability 
for the multibillion-dollar E-rate program. Lack of clarity about what 
accountability standards apply to the program causes confusion among 
program participants and can lead to situations where funding 
commitments are interrupted pending decisions about applicable law, 
such as happened with the Antideficiency Act in the fall of 2004. 
Ineffective performance goals and measures make it difficult to assess 
the program's effectiveness and chart its future course. Weaknesses in 
oversight and enforcement can lead to misuse of E-rate funding by 
program participants that, in turn, deprives other schools and 
libraries whose requests for support were denied due to funding 
limitations.
    To address these management and oversight problems identified in 
our review of the E-rate program, our report recommends that the 
Chairman of FCC direct commission staff to (1) conduct and document a 
comprehensive assessment to determine whether all necessary government 
accountability requirements, policies, and practices have been applied 
and are fully in place to protect the E-rate program and universal 
service funding; (2) establish meaningful performance goals and 
measures for the E-rate program; and (3) develop a strategy for 
reducing the E-rate program's appeals backlog, including ensuring that 
adequate staffing resources are devoted to E-rate appeals.
    We provided a draft of our report to FCC for comment. FCC said that 
it took a number of steps in 2004 to improve its management and 
oversight of the program, and anticipates taking additional steps 
during the coming year. FCC concurred with our recommendations on 
establishing performance goals and measures and developing a strategy 
for reducing the backlog of appeals. FCC did not concur with our 
recommendation that it conduct a comprehensive assessment concerning 
the applicability of government accountability requirements, policies, 
and practices. FCC maintains that it has already done so on a case-by-
case basis. As noted in our report, however, we believe that major 
issues remain unresolved, such as the implications of FCC's 
determination that the Universal Service Fund constitutes an 
appropriation under the current structure of the E-rate program and the 
extent to which FCC has delegated some program functions to USAC.

Scope and Methodology
    We conducted our work from December 2003 through December 2004 in 
accordance with generally accepted government auditing standards. We 
interviewed officials from FCC's Wireline Competition Bureau, 
Enforcement Bureau, Office of General Counsel, Office of Managing 
Director, Office of Strategic Planning and Policy Analysis, and Office 
of Inspector General. We also interviewed officials from USAC. In 
addition, we interviewed officials from OMB and the Department of 
Education regarding performance goals and measures. OMB had conducted 
its own assessment of the E-rate program in 2003, which we also 
discussed with OMB officials. We reviewed and analyzed FCC, USAC, and 
OMB documents related to the management and oversight of the E-rate 
program. The information we gathered was sufficiently reliable for the 
purposes of our review. See our full report for a more detailed 
explanation of our scope and methodology.
    This concludes my prepared statement. I would be pleased to respond 
to any questions that you or other Members of the Committee may have.

   Appendix I: Fiscal Law Issues Involving the Universal Service Fund

    There have been questions from the start of the E-rate program 
regarding the nature of the Universal Service Fund (USF) and the 
applicability of managerial, fiscal, and financial accountability 
requirements to USF. FCC has never clearly determined the nature of 
USF, and the Office of Management and Budget (OMB), the Congressional 
Budget Office (CBO), and GAO have at various times noted that USF has 
not been recognized or treated as federal funds for several purposes. 
\1\ However, FCC has never confronted or assessed these issues in a 
comprehensive fashion and has only recently begun to address a few of 
these issues. In particular, FCC has recently concluded that as a 
permanent indefinite appropriation, USF is subject to the 
Antideficiency Act and its funding commitment decision letters 
constitute obligations for purposes of the Antideficiency Act. As 
explained below, we agree with FCC's determination. However, FCC's 
conclusions concerning the status of USF raise further issues related 
to the collection, deposit, obligation, and disbursement of those 
funds--issues that FCC needs to explore and resolve.
---------------------------------------------------------------------------
    \1\ See GAO, Schools and Libraries Program: Application and Invoice 
Review Procedures Need Strengthening, GAO-01-105, 41. FCC's IG has also 
raised questions regarding the nature of USF. FCC's IG first looked at 
USF in 1999 as part of its audit of the commission's fiscal year 1999 
financial statement. During that audit, the FCC IG questioned 
commission staff regarding the nature of the fund and, specifically, 
whether USF was subject to the statutory and regulatory requirements 
for federal funds. In the next year's audit, the FCC IG noted that the 
commission could not ensure that USF activities were in compliance with 
all laws and regulations because the issue of which laws and 
regulations were applicable to USF was still unresolved at the end of 
the audit. In the FCC IG's reports on FCC's financial statements from 
fiscal years 1999 to 2003, the IG consistently recommended that FCC 
management formally define in writing the financial management roles 
and responsibilities of FCC and USAC to avoid confusion and 
misunderstanding.
---------------------------------------------------------------------------
Background
    Universal service has been a basic goal of telecommunications 
regulation since the 1950s, when FCC focused on increasing the 
availability of reasonably priced, basic telephone service. See Texas 
Office of Public Utility Counsel v. FCC, 183 F.3d 393, 405-406 (5th 
Cir., 1999), cert. denied sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 
(2000). FCC has not relied solely on market forces, but has used a 
combination of explicit and implicit subsidies to achieve this goal. 
Id. Prior to 1983, FCC used the regulation of AT&T's internal rate 
structure to garner funds to support universal service. With the 
breakup of AT&T in 1983, FCC established a Universal Service Fund 
administered by the National Exchange Carrier Association (NECA). NECA 
is an association of incumbent local telephone companies, also 
established at the direction of the FCC. Among other things, NECA was 
to administer universal service through interstate access tariffs and 
the revenue distribution process for the nation's local telephone 
companies. At that time, NECA, a nongovernmental entity, privately 
maintained the Universal Service Fund outside the U.S. Treasury.
    Section 254 of the Telecommunications Act of 1996 codified the 
concept of universal service and expanded it to include support for 
acquisition by schools and libraries of telecommunications and Internet 
services. Pub. L. No. 104-104, Sec. 254, 110 Stat. 56 (1996) 
(classified at 47 U.S.C. Sec. 254). The act defines universal service, 
generally, as a level of telecommunications services that FCC 
establishes periodically after taking into account various 
considerations, including the extent to which telecommunications 
services are essential to education, public health, and public safety. 
47 U.S.C. Sec. 254(c)(1). The act also requires that ``every 
telecommunications carrier that provides interstate telecommunications 
services shall contribute . . . to the specific, predictable, and 
sufficient mechanisms'' established by FCC ``to preserve and advance 
universal service.'' Id., Sec. 254(d). The act did not specify how FCC 
was to administer the E-rate program, but required FCC, acting on the 
recommendations of the Federal-State Joint Board, to define universal 
service and develop specific, predictable, and equitable support 
mechanisms.
    FCC designated the Universal Services Administrative Company 
(USAC), a nonprofit corporation that is a wholly owned subsidiary of 
NECA, as the administrator of the universal service mechanisms. \2\ 
USAC administers the program pursuant to FCC orders, rules, and 
directives. As part of its duties, USAC collects the carriers' 
universal service contributions, which constitute the Universal Service 
Fund, and deposits them to a private bank account under USAC's control 
and in USAC's name. FCC has directed the use of USF to, among other 
things, subsidize advanced telecommunications services for schools and 
libraries in a program commonly referred to as the E-rate program. \3\ 
Pursuant to the E-rate program, eligible schools and libraries can 
apply annually to receive support and can spend the funding on specific 
eligible services and equipment, including telephone services, Internet 
access services, and the installation of internal wiring and other 
related items. Generally, FCC orders, rules, and directives, as well as 
procedures developed by USAC, establish the program's criteria. USAC 
carries out the program's day-to-day operations, such as answering 
inquiries from schools and libraries; processing and reviewing 
applications; making funding commitment decisions and issuing funding 
commitment decision letters; and collecting, managing, investing, and 
disbursing E-rate funds.
---------------------------------------------------------------------------
    \2\ In 1998, we issued a legal opinion on the then-current 
structure of the E-rate program where FCC directed the creation of the 
Schools and Libraries Corporation to administer the universal service 
program. Under the Government Corporation Control Act, an agency must 
have specific statutory authority to establish a corporation. 31 U.S.C. 
Sec. 9102. We concluded that FCC did not have authority to create a 
separate independent corporation to administer the E-rate program. B-
278820, Feb. 10, 1998. Subsequently, FCC eliminated the Schools and 
Libraries Corporation as a separate entity, and restructured the 
universal service program to its present form.
    \3\ The term ``E-rate'' evolved from some individuals referring to 
the program as the ``Education'' rate.
---------------------------------------------------------------------------
    Eligible schools and libraries may apply annually to receive E-rate 
support. The program places schools and libraries into various discount 
categories, based on indicators of need. As a result of the application 
of the discount rate to the cost of the service, the school or library 
pays a percentage of the cost for the service and the E-rate program 
covers the remainder. E-rate discounts range from 20 percent to 90 
percent.
    Once the school or library has complied with the program's 
requirements and entered into agreements with vendors for eligible 
services, the school or library must file a form with USAC noting the 
types and costs of the services being contracted for, the vendors 
providing the services, and the amount of discount being requested. 
USAC reviews the forms and issues funding commitment decision letters. 
\4\ The funding commitment decision letters notify the applicants of 
the decisions regarding their E-rate discounts. These funding 
commitment decision letters also notify the applicants that USAC will 
send the information on the approved E-rate discounts to the providers 
so that ``preparations can be made to begin implementing . . . E-rate 
discount(s) upon the filing [by the applicant] of . . . Form 486.'' The 
applicant files FCC Form 486 to notify USAC that services have started 
and USAC can pay service provider invoices. Generally, the service 
provider seeks reimbursement from USAC for the discounted portion of 
the service, although the school or library also could pay the service 
provider in full and then seek reimbursement from USAC for the discount 
portion.
---------------------------------------------------------------------------
    \4\ USAC could reduce the amount requested if the school or library 
has included ineligible services in its application or has calculated 
its discount category incorrectly.
---------------------------------------------------------------------------
What Is the Universal Service Fund?
    The precise phrasing of the questions regarding the nature of USF 
has varied over the years, including asking whether they are federal 
funds, appropriated funds, or public funds and, if so, for what 
purposes? While the various fiscal statutes may use these different 
terms to describe the status of funds, we think the fundamental issue 
is what statutory controls involving the collection, deposit, 
obligation, and disbursement of funds apply to USF. As explained below, 
funds that are appropriated funds are subject, unless specifically 
exempted by law, to a variety of statutory provisions providing a 
scheme of funds controls. See B-257525, Nov. 30, 1994; 63 Comp. Gen. 31 
(1983); 35 Comp. Gen. 436 (1956); B-204078.2, May 6, 1988. On the other 
hand, funds that are not appropriated funds are not subject to such 
controls unless the law specifically applies such controls. Thus, we 
believe the initial question is whether USF funds are appropriated 
funds.
    FCC has concluded that USF constitutes a permanent indefinite 
appropriation. We agree with FCC's conclusion. Typical language of 
appropriation identifies a fund or account as an appropriation and 
authorizes an agency to enter into obligations and make disbursements 
out of available funds. For example, Congress utilizes such language in 
the annual appropriations acts. See 1 U.S.C. Sec. 105 (requiring 
regular annual appropriations acts to bear the title ``An Act making 
appropriations . . . ''). Congress, however, appropriates funds in a 
variety of ways other than in regular annual appropriation acts. \5\ 
Indeed, our decisions and those of the courts so recognize.
---------------------------------------------------------------------------
    \5\ Congress has recognized that an appropriation is a form of 
budget authority that makes funds available to an agency to incur 
obligations and make expenditures in a number of different statutes. 
For example, see 2 U.S.C. Sec. 622(2)(A)(i) (budget authority includes 
``provisions of law that make funds available for obligation and 
expenditure . . . including the authority to obligate and expend the 
proceeds of offsetting receipts and collections'') and 31 U.S.C. 
Sec. 701(2)(C) (appropriations include ``other authority making amounts 
available for obligation or expenditure'').
---------------------------------------------------------------------------
    Thus, a statute that contains a specific direction to pay, and a 
designation of funds to be used, constitutes an appropriation. 63 Comp. 
Gen. 331 (1984); 13 Comp. Gen. 77 (1933). In these statutes, Congress 
(1) authorizes the collection of fees and their deposit into a 
particular fund, and (2) makes the fund available for expenditure for a 
specified purpose without further action by Congress. This authority to 
obligate or expend collections without further congressional action 
constitutes a continuing appropriation or a permanent appropriation of 
the collections. E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 
(DC Cir. 1965), cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 
262 (1990); 73 Comp. Gen. 321 (1994). Our decisions are replete with 
examples of permanent appropriations, such as revolving funds and 
various special deposit funds, including mobile home inspection fees 
collected by the Secretary of Housing and Urban Development, \6\ 
licensing revenues received by the Commission on the Bicentennial, \7\ 
tolls and other receipts deposited in the Panama Canal Revolving Fund, 
\8\ user fees collected by the Saint Lawrence Seaway Development 
Corporation, \9\ user fees collected from tobacco producers to provide 
tobacco inspection, certification and other services, \10\ and user 
fees collected from firms using the Department of Agriculture's meat 
grading services. \11\ It is not essential for Congress to expressly 
designate a fund as an appropriation or to use literal language of 
``appropriation,'' so long as Congress authorizes the expenditure of 
fees or receipts collected and deposited to a specific account or fund. 
\12\ In cases where Congress does not intend these types of collections 
or funds to be considered ``appropriated funds,'' it explicitly states 
that in law. See e.g., 12 U.S.C. Sec. 244 (the Federal Reserve Board 
levies assessments on its member banks to pay for its expenses and 
``funds derived from such assessments shall not be construed to be 
government funds or appropriated moneys''); 12 U.S.C. Sec. 1422b(c) 
(the Office of Federal Housing Enterprise Oversight levies assessments 
upon the Federal Home Loan Banks and from other sources to pay its 
expenses, but such funds ``shall not be construed to be government 
funds or appropriated monies, or subject to apportionment for the 
purposes of chapter 15 of title 31, or any other authority'').
---------------------------------------------------------------------------
    \6\ 59 Comp. Gen. 215 (1980).
    \7\ B-228777, Aug. 26, 1988.
    \8\ B-204078.2, May 6, 1988 and B-257525, Nov. 30, 1994.
    \9\ B-193573, Jan. 8, 1979; B-193573, Dec. 19, 1979; B-217578, Oct. 
16, 1986.
    \10\ 63 Comp. Gen. 285 (1984).
    \11\ B-191761, Sept. 22, 1978.
    \12\ B-193573, Dec. 19, 1979.
---------------------------------------------------------------------------
    Like the above examples, USF's current authority stems from a 
statutorily authorized collection of fees from telecommunication 
carriers, and expenditures for a specified purpose--that is, the 
various types of universal service. \13\ Thus, USF meets both elements 
of the definition of a permanent appropriation.
---------------------------------------------------------------------------
    \13\ The United States Court of Appeals for the Fifth Circuit has 
recognized the governmental character of the funds. Texas Office of 
Public Utility Counsel v. FCC, 183 F.3d 393, 426-428 (5th Cir., 1999), 
cert. denied sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 2212 (2000). 
The Fifth Circuit held that USF funds are statutorily mandated special 
assessments supporting a federal program mandated by Congress. FCC has 
also requested that the Department of Justice recognize that USF are 
federal funds for purposes of representing FCC and the United States in 
litigation involving USF, such as the False Claims Act.
---------------------------------------------------------------------------
    We recognize that prior to the passage of the Telecommunications 
Act of 1996, there existed an administratively sanctioned universal 
service fund. With the Telecommunications Act of 1996, Congress 
specifically expanded the contribution base of the fund, statutorily 
mandated contributions into the fund, and designated the purposes for 
which the monies could be expended. These congressional actions 
established USF in a manner that meets the elements for a permanent 
appropriation and Congress did not specify that USF should be 
considered anything other than an appropriation. \14\
---------------------------------------------------------------------------
    \14\ The Senate passed a ``sense of the Senate'' provision that 
stated, ``Federal and State universal service contributions are 
administered by an independent nonfederal entity and are not deposited 
into the federal Treasury and therefore are not available for federal 
appropriations.'' See section 614, H.R. 2267, as passed by the Senate 
(Oct. 1, 1997). However, the purpose of that resolution was to respond 
to an attempt to withhold USF payments as a means to balance the 
federal budget or achieve budget savings. We understand section 614, 
H.R. 2267 intended to insulate USF from budgetary pressures and not to 
express a view on the proper fiscal treatment of USF. Our 
interpretation of USF as a permanent appropriation is consistent with 
the intent that USF is only available for universal service and could 
only be changed if Congress amended the law to permit USF to be used 
for other purposes.
---------------------------------------------------------------------------
Does the Antideficiency Act Apply to USF?
    Appropriated funds are subject to a variety of statutory controls 
and restrictions. These controls and restrictions, among other things, 
limit the purposes for which they may be used and provide a scheme of 
funds control. See e.g., 63 Comp. Gen. 110 (1983); B-257525, Nov. 30, 
1994; B-228777, Aug. 26, 1988; B-223857, Feb. 27, 1987; 35 Comp. Gen. 
436 (1956). A key component of this scheme of funds control is the 
Antideficiency Act. B-223857, Feb. 27, 1987. The Antideficiency Act 
\15\ has been termed ``the cornerstone of congressional efforts to bind 
the executive branch of government to the limits on expenditure of 
appropriated funds.'' \16\ Primarily, the purpose of the Antideficiency 
Act is to prevent the obligation and expenditure of funds in excess of 
the amounts available in an appropriation or in advance of the 
appropriation of funds. 31 U.S.C. Sec. 1341(a)(1). FCC has determined 
that the Antideficiency Act applies to USF, and as explained below, we 
agree with FCC's conclusion.
---------------------------------------------------------------------------
    \15\ 31 U.S.C. Sec. Sec. 1341, 1342 and 1517.
    \16\ Hopkins & Nutt, The Anti-deficiency Act (Revised Statutes 
3679) and Funding Federal Contracts: An Analysis, 80 Mil. L. Rev. 51, 
56 (1978).
---------------------------------------------------------------------------
    The Antideficiency Act applies to ``officer[s] or employee[s] of 
the United States Government . . . mak[ing] or authoriz[ing] an 
expenditure or obligation . . . from an appropriation or fund.'' 31 
U.S.C. Sec. 1341(a). As established above, USF is an ``appropriation or 
fund.'' The fact that USAC, a private entity whose employees are not 
federal officers or employees, is the administrator of the E-rate 
program and obligates and disburses funds from USF is not dispositive 
of the application of the Antideficiency Act. This is because, as the 
FCC recognizes, it, not USAC, is the entity that is legally responsible 
for the management and oversight of the E-rate program and FCC's 
employees are federal officers and employees of the United States 
subject to the Antideficiency Act. \17\
---------------------------------------------------------------------------
    \17\ Under FCC's rules, USAC is prohibited from making policy, 
interpreting unclear provisions of the statute or rules, or 
interpreting the intent of Congress. 47 CFR Sec. 54.702(c). As 
addressed below, one of the issues that remains to be resolved is 
whether USAC is authorized to take the actions that obligate and 
disburse USF funds pursuant to FCC orders, rules, and directives or 
whether FCC must implement additional steps to ensure that obligations 
and disbursements are specifically authorized by FCC officials and 
employees.
---------------------------------------------------------------------------
    Where entities operate with funds that are regarded as appropriated 
funds, such as some government corporations, they, too, are subject to 
the Antideficiency Act. See e.g., B-223857, Feb. 27, 1987 (funds 
available to Commodity Credit Corporation pursuant to borrowing 
authority are subject to the Antideficiency Act); B-135075-O.M., Feb. 
14, 1975 (Inter-American Foundation). The Antideficiency Act applies to 
permanent appropriations such as revolving funds \18\ and special 
funds. 72 Comp. Gen. 59 (1992) (Corps of Engineers Civil Works 
Revolving Fund subject to the Antideficiency Act); B-120480, Sep. 6, 
1967, B-247348, June 22, 1992, and B-260606, July 25, 1997 (GPO 
revolving funds subject to Antideficiency Act); 71 Comp. Gen. 224 
(1992) (special fund that receives fees, reimbursements, and advances 
for services available to finance its operations is subject to 
Antideficiency Act).
---------------------------------------------------------------------------
    \18\ Revolving funds are funds authorized by law to be credited 
with collections and receipts from various sources that generally 
remain available for continuing operations of the revolving fund 
without further congressional action. See 72 Comp. Gen. 59 (1992).
---------------------------------------------------------------------------
    Where Congress intends for appropriated funds to be exempt from the 
application of statutory controls on the use of appropriations, 
including the Antideficiency Act, it does so expressly. See e.g., B-
193573, Jan. 8, 1979; B-193573, Dec. 19, 1979; B-217578, Oct. 16, 1986 
(Saint Lawrence Seaway Development Corporation has express statutory 
authority to determine the character and necessity of its obligations 
and is therefore exempt from many of the restrictions on the use of 
appropriated funds that would otherwise apply); B-197742, Aug. 1, 1986 
(Price-Anderson Act expressly exempts the Nuclear Regulatory Commission 
from Antideficiency Act prohibition against obligations or expenditures 
in advance or in excess of appropriations). There is no such exemption 
for FCC or USF from the prohibitions of the Antideficiency Act. Thus, 
USF is subject to the Antideficiency Act.

Do the Funding Commitment Decision Letters Issued to Schools and 
        Libraries Constitute Obligations?
    An important issue that arises from the application of the 
Antideficiency Act to USF is what actions constitute obligations 
chargeable against the fund. Understanding the concept of an obligation 
and properly recording obligations are important because an obligation 
serves as the basis for the scheme of funds control that Congress 
envisioned when it enacted fiscal laws such as the Antideficiency Act. 
B-300480, Apr. 9, 2003. For USF's schools and libraries program, one of 
the main questions is whether the funding commitment decision letters 
issued to schools and libraries are properly regarded as obligations. 
FCC has determined that funding commitment decision letters constitute 
obligations. And again, as explained below, we agree with FCC's 
determination.
    Under the Antideficiency Act, an agency may not incur an obligation 
in excess of the amount available to it in an appropriation or fund. 31 
U.S.C. Sec. 1341(a). Thus, proper recording of obligations with respect 
to the timing and amount of such obligations permits compliance with 
the Antideficiency Act by ensuring that agencies have adequate budget 
authority to cover all of their obligations. \19\ B-300480, Apr. 9, 
2003. We have defined an ``obligation'' as a ``definite commitment that 
creates a legal liability of the government for the payment of goods 
and services ordered or received.'' Id. A legal liability is generally 
any duty, obligation or responsibility established by a statute, 
regulation, or court decision, or where the agency has agreed to assume 
responsibility in an interagency agreement, settlement agreement or 
similar legally binding document. Id. citing to Black's Law Dictionary 
925 (7th ed. 1999). The definition of ``obligation'' also extends to 
``[a] legal duty on the part of the United States which constitutes a 
legal liability or which could mature into a legal liability by virtue 
of actions on the part of the other party beyond the control of the 
United States . . . '' Id. citing to 42 Comp. Gen. 733 (1963); see also 
McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 295, 301 (1997).
---------------------------------------------------------------------------
    \19\ Legal liability for obligational accounting and to comply with 
the Antideficiency Act and the Recording Statute, 31 U.S.C. Sec. 1501 
is distinct from accounting liabilities and projections booked in its 
proprietary accounting systems for financial statement purposes. For 
proprietary accounting purposes, a liability is probable and measurable 
future outflow or other sacrifice of resources as a result of past 
transactions or events. See B-300480, Apr. 9, 2003, and FASAB Statement 
of Federal Financial Accounting Standards Number 1.
---------------------------------------------------------------------------
    The funding commitment decision letters provided to applicant 
schools and libraries notify them of the decisions regarding their E-
rate discounts. In other words, it notifies them whether their funding 
is approved and in what amounts. The funding commitment decision 
letters also notify schools and libraries that the information on the 
approved E-rate discounts is sent to the providers so that 
``preparations can be made to begin implementing . . . E-rate 
discount(s) upon the filing [by applicants] of . . . Form 486.'' The 
applicant files FCC Form 486 to notify USAC that services have started 
and USAC can pay service provider invoices. At the time a school or 
library receives a funding commitment decision letter, the FCC has 
taken an action that accepts a ``legal duty . . . which could mature 
into a legal liability by virtue of actions on the part of the grantee 
beyond the control of the United States.'' Id. citing 42 Comp. Gen. 
733, 734 (1963). In this instance, the funding commitment decision 
letter provides the school or library with the authority to obtain 
services from a provider with the commitment that it will receive a 
discount and the provider will be reimbursed for the discount provided. 
While the school or library could decide not to seek the services or 
the discount, so long as the funding commitment decision letter remains 
valid and outstanding, USAC and FCC no longer control USF's liability; 
it is dependent on the actions taken by the other party--that is, the 
school or library. In our view, a recordable USF obligation is incurred 
at the time of issuance of the funding commitment decision letter 
indicating approval of the applicant's discount. Thus, these 
obligations should be recorded in the amounts approved by the funding 
commitment decision letters. If at a later date, a particular applicant 
uses an amount less than the maximum or rejects funding, then the 
obligation amount can be adjusted or deobligated, respectively.
    Additional issues that remain to be resolved by FCC include whether 
other actions taken in the universal service program constitute 
obligations and the timing of and amounts of obligations that must be 
recorded. For example, this includes the projections and data 
submissions by USAC to FCC and by participants in the High Cost and Low 
Income Support Mechanisms to USAC. FCC has indicated that it is 
considering this issue and consulting with the Office of Management and 
Budget. FCC should also identify any other actions that may constitute 
recordable obligations and ensure those are properly recorded.

    Senator Stevens. Thank you very much.
    Ms. Abshire.

             STATEMENT OF SHERYL ABSHIRE, DISTRICT 
  ADMINISTRATIVE COORDINATOR OF TECHNOLOGY, CALCASIEU PARISH 
                         PUBLIC SCHOOLS

    Ms. Abshire. Thank you, Mr. Chairman and Members of the 
Committee. It is a great honor to be asked to testify in 
support of universal service and the E-rate program. I'm also 
here to urge you to support S. 241, a bill that would ensure 
that universal service and E-rate discounts continue to flow to 
telephone customers, schools and libraries.
    My name is Sheryl Abshire and I am the District 
Administrative Coordinator of Technology for Calcasieu Parish 
Public Schools in Lake Charles, Louisiana. Currently, I'm board 
chair of the Consortium for School Networking, CoSN, a non-
profit education technology association that promotes the use 
of information technologies and the Internet to improve K 
through 12 education. I'm also representing the Education and 
Libraries Network Coalition, an E-rate advocacy organization 
that's comprised of every major public and private school 
organization and the American Library Association.
    CoSN and EdLiNC were greatly dismayed by the E-rate's 
program shutdown last year as a result of the application of 
the Antideficiency Act. We strongly supported Congress' 
temporary exemption from that Act for universal service and E-
rate. And I'm here today to urge Congress to pass S. 241 and 
prevent a replay of last year's devastating funding disruption.
    The E-rate has had an extraordinary nationwide impact on 
education in its 7 years of existence. It has improved schools' 
public classroom connections to the Internet from 14 percent in 
1998 to 93 percent as of 2003. It has allowed students in rural 
and isolated areas to take online courses in subjects not 
available in their schools. It has also permitted teachers to 
take online accreditation courses to become highly qualified as 
required by No Child Left Behind.
    Let me now say a few words about what the E-rate has done 
for my school district in Lake Charles, Louisiana. The 
Calcasieu Parish Public Schools educates over 32,000 students 
and employs more than 5,000 people. We are the sixth largest 
school district in the state and the largest employer in the 
parish.
    Thirty-six percent of our student population is from 
minority groups and 53 percent of our students are eligible for 
the Federal free and reduced price lunch program. We qualified 
for a 72 percent E-rate discount. Before E-rate, our 
connectivity primarily consisted of dialup connections and the 
technology program consisted of random trainings to teachers in 
how to use computers.
    Today, however, all this has changed. We now have over 
11,000 computers connected to our network and at any given 
moment over 6,000 of them are accessing the network. Each day 
our students, our teachers, and our administrators make more 
than three million web page or network object requests and send 
and receive over 30,000 e-mail messages and transmit an 
astounding 14.5 gigabytes of data. Last fall, our school system 
was recognized as one of the most digitally advanced in the 
country by the Center for Digital Education and the National 
School Boards Association.
    How did all this occur in such a short period of time? The 
answer is simply E-rate. Over the E-rate's first 7 years, the 
Calcasieu Parish schools have received just over $4 million in 
E-rate discounts. We have used this money for infrastructure 
upgrades that will support 100 megabit connections to every 
desktop of every computer in our district. E-rate discounts 
also support our telephone service, cellular phones and 
installation and upgrade of our high speed network to all 59 of 
our schools in our compressed video services. I believe that we 
have made good use of our E-rate support.
    Each year we have paid careful heed to our district's needs 
and we only sought E-rate discounts in accordance with 
documented needs. We have never attempted to maximize our E-
rate discounts nor have we overbought technology. We understand 
that E-rate is a finite and precious resource particularly 
because it has a hard cap of 2.25 billion per year.
    We also know that our technology infrastructure is useless 
without ample instruction on how to use it and integrate it 
into the curriculum. We provide extensive professional 
development for teachers and administrators before we apply any 
type of technology. But the real proof of the E-rate is in its 
impact on students.
    A prime example is the story of John F. Kennedy Elementary. 
It's a school where 95 percent of the students participate in a 
free lunch program. Thirty-seven percent of its student scored 
below basic in reading and 75 percent scored below basic in 
math. We used E-rate discounts to connect every classroom to 
the Internet, then we used Title I dollars to purchase 
computers for every classroom and established after school 
programs at Kennedy that targeted online technology resources 
to specific documented student needs.
    The results have been outstanding. Recent test scores 
indicate only 16 percent of these students are now below basic 
in reading and only 21 percent scored below basic in math. In 
response, the U.S. Department of Education awarded Kennedy 
Elementary the Title I distinguished school award for closing 
the achievement gap among all groups in the school.
    I'm convinced that E-rate played a significant role in this 
situation. All this leads me to implore you to make sure the 
program remains smooth, running and vibrant. The Universal 
Service Administrative Company shut down of the program for 3 
months last year was a major catastrophe for my district. We 
were delayed in implementing our infrastructure, a delay in 
implementing a library resource center and what a tragedy for 
our teachers and students to be ready, willing and able to make 
use of their resources only to be denied because of an 
accounting issue.
    In sum, E-rate has been a blessing for my district. This 
propelled us from the technology backwater to a nationally 
recognized district in 6 years. It placed distance learning, 
professional development and resources at the fingertips of 
everyone, and it's helped us to make significant progress. 
Please help to us continue our work by preventing any 
unnecessary disruptions to the programs.
    I want to thank Senators Snowe and Rockefeller for 
introducing the bill, Chairman Stevens and Ranking Member 
Inouye for signing on as original co-sponsors, and all of the 
Senators who have co-sponsored it. Thank you for this hearing 
today, Chairman Stevens, for giving me an opportunity to share 
my views on Universal Service and E-rate and I would be pleased 
to take any questions.
    [The prepared statement of Ms. Abshire follows:]

     Prepared Statement of Sheryl Abshire, District Administrative 
       Coordinator of Technology, Calcasieu Parish Public Schools

    Thank you, Mr. Chairman and Members of the Committee. It is a great 
honor to be asked to testify before you today in support of a program 
that I care for deeply--universal service and, especially, the E-rate 
program--and in favor of S. 241, a bill that would ensure that 
universal service and E-rate support continue to flow uninterrupted to 
deserving telephone consumers, schools and libraries.
    My name is Sheryl Abshire and I have been the District 
Administrative Coordinator of Technology for Calcasieu Parish Public 
Schools in Lake Charles, Louisiana for the past 7 years. I have been an 
educator for more than 30 years, serving variously as a school 
principal, K-5 teacher, a library/media specialist, a classroom 
teacher, and an adjunct college professor. I have substantial 
experience with the integration of education technology into the 
classroom, including working with the International Society for 
Technology in Education to compile technology standards for teachers, 
students, and most recently school administrators.
    Currently, I hold the Board Chair of the Consortium for School 
Networking--or CoSN, a non-profit education technology association that 
promotes the use of information technologies and the Internet to 
improve K-12 education. CoSN has long been a champion of the E-rate 
program and views it as essential to attaining the high goals of the No 
Child Left Behind Act and preparing our students for today's 
competitive, high-tech oriented job market.
    CoSN was greatly dismayed by the E-rate program's shutdown last 
year as a result of the application of the Antideficiency Act to the E-
rate program. We strongly supported the ultimately successful efforts 
to gain a temporary exemption from a key provision of that Act for all 
of universal service, including the E-rate. I come before you today to 
urge that last year's temporary exemption to the Antideficiency Act be 
made permanent and to state my support and that of the Consortium for 
School Networking for S. 241, a bill that would do just that.
    I am also here representing the Education and Libraries Networks 
Coalition--or EdLiNC, an E-rate advocacy organization that is comprised 
of every major public and private school organization, including CoSN, 
and the American Library Association. EdLiNC has advocated in support 
of the E-rate program since its inception and continues to this day to 
work to address E-rate implementation issues before Congress and the 
FCC.
    I am attaching as part of my testimony today a letter (Exhibit A), 
signed by nineteen EdLiNC member organizations, that details the 
extraordinary impact that the E-rate has had nationwide, particularly 
its success in improving public school classroom connections to the 
Internet from 14 percent in 1998, when the E-rate first rolled-out, to 
93 percent as of 2003. The letter also outlines how the E-rate has been 
instrumental in improving education by affording students in rural and 
isolated areas the opportunity to take online courses in subjects not 
available in their schools. It has also permitted teachers to take 
online accreditation courses that help them attain the ``highly 
qualified'' status required by the No Child Left Behind Act. In order 
to continue this good work, EdLiNC urges--as do CoSN and I--that 
Congress pass S. 241 and prevent a replay of last year's devastating 
funding disruption.
    While I have spoken of the tremendous national impact of the E-
rate, please allow me to say a few words about all that the E-rate has 
done for my school district in Lake Charles, Louisiana. Calcasieu 
Parish Public Schools educates over 32,000 students and employs more 
than 5,000 people. We are the sixth largest school district in the 
state and the largest employer in the parish. Thirty-six percent of our 
student population is from a minority group and 53 percent of all 
Calcasieu Parish students are eligible for the federal free-and-reduced 
price lunch program. Based on this last figure, Calcasieu Parish Public 
Schools qualified this year for a 72 percent E-rate discount rate.
    When the E-rate began over 7 years ago, our connectivity consisted 
of a few dial-up connections in our school libraries, and our 
technology professional development program consisted of random 
trainings to teach teachers just how to turn on the computers and, 
occasionally, how to use a specific program with a student.
    Today, this has all changed. We now have over 11,000 computers 
connected to our network and, at any given moment, over 6,000 of them 
are accessing the network. Each day, our students, teachers and 
administrators make more than 3 million web page or network object 
requests, send or receive over 30,000 e-mail messages, and transmit 
14.5 gigabytes of data. Last fall, the Center for Digital Education and 
National School Boards Association recognized us as one of the most 
digitally advanced large district school boards in the country.
    How did all of this occur in such a short period of time? The 
answer is the E-rate.
    Calcasieu Parish Public Schools has applied for E-rate discounts in 
each of the program's first 7 years, receiving to date just over $4 
million. A sizable chunk of this money has gone to support a currently 
ongoing infrastructure upgrade that, when completed, will support 100 
megabit connections to all 11,000 desktops attached to our network. The 
vast majority of these funds have been used to support plain old 
telephone service, cellular phone service, the installation and upgrade 
of a high-speed network to all of our 59 schools, and the bandwidth 
used by our compressed video services.
    I believe that we have made wise use of our E-rate support. Each 
year, we have paid careful heed to our district's technology needs and 
its financial capabilities, as laid out in our collaboratively 
developed technology plan, and have only sought E-rate discounts in 
accordance with documented needs. We have never attempted to ``maximize 
our E-rate discounts,'' nor have we ``over-bought'' technology or 
network resources with E-rate support. At Calcasieu Parish Public 
Schools we understand that the E-rate is a finite and precious 
resource, particularly since it has a hard annual cap of $2.25 billion 
per year.
    We also know, though, that our technology infrastructure is useless 
without ample instruction on how to use it and integrate it into the 
curriculum. For that reason, no technology has been deployed in our 
district without intensive professional development for teachers and 
administrators. We provide intensive professional development courses 
annually to over 300 teachers and over 300 pre-service teacher 
candidates, rotating that training to different grade levels each year. 
Additionally, all teachers in our district actively participate in 
instructional technology training through online and face-to-face 
workshops and in-service trainings. These professional development 
efforts have paid-off with our recent national recognition for 
innovative use of online professional development using the Blackboard 
platform.
    The real proof of the value of Calcasieu's and the E-rate's 
investment in technological infrastructure, however, is its impact on 
our students. The formal mission of my department is to ``Advance 
Quality Education with Technology.'' The E-rate is helping us 
accomplish this goal.
    A prime example from Calcasieu Parish of which I am particularly 
proud is John F. Kennedy Elementary. A few years ago, Kennedy 
Elementary, a high poverty school where 95 percent of its students 
participate in the federal lunch program, was a failing school. 
Starting in 1998, we used E-rate discounts to connect all of its 
classrooms to the Internet and strategically leveraged Title I dollars 
to purchase computers for each classroom. The district then established 
after school programs at Kennedy that targeted online technology 
resources to specific student needs that we identified through multiple 
assessment analyses.
    The results have been outstanding. Last year, Kennedy Elementary 
was recognized as one of the leading schools in the State of Louisiana 
for closing the achievement gap among all groups in the school, 
performing above the state average in all school performance categories 
and successfully meeting AYP--Annual Yearly Progress as defined by 
NCLB. The U.S. Department of Education awarded Kennedy Elementary the 
Distinguished Schools Award for ``outstanding achievement and progress 
towards the goal that all students achieve the state standards of 
academic excellence.'' I am convinced that E-rate played a significant 
role in this achievement by delivering the online educational resources 
that helped spur these incredible gains.
    All of this leads me to implore you to make sure that the program 
remains not just in operation but smooth running and vibrant. The 
Universal Service Administrative Company shutdown of the program for 
three months last year was a major catastrophe for our district. 
Overall, it set back our infrastructure upgrade anywhere from six 
months to a year. This inability to complete our upgrade, in turn, 
caused extensive delays in fully implementing a new student information 
system and data warehouse, both of which are critical to improving 
instruction. The upgrade delay also caused us to eliminate our plans to 
launch bandwidth intensive video streaming resources in order to assure 
we had sufficient bandwidth to manage the district's day-to-day network 
functions, such as basic Internet access, e-mail, and attendance and 
grading systems. Finally, the upgrade delays caused by the shutdown 
derailed a long-planned upgrade of our library resources, which would 
have established a fully automated district-wide online resource 
center. What a tragedy for our teachers and students to be ready, 
willing and able to make use of all of these fantastic new resources 
and to have to stand idle because of an E-rate accounting issue!
    Without the passage of a permanent exemption to the Antideficiency 
Act, we fear another shutdown for the E-rate at the end of this year 
and even longer delays in building-out our network and providing the 
learning opportunities that are essential for today's students.
    In sum, the E-rate has been a blessing for my district, propelling 
it from a technological backwater to a nationally recognized technology 
model in six short years. Our students, teachers, library/media 
specialists and administrators have all benefited greatly from the 
distance learning courses, online professional development, and the 
wealth of Web-based material that the E-rate has put at their 
fingertips. We continue to make significant progress academically in 
our schools, which, in no small measure, is helped by the E-rate. 
Please help us continue our work by preventing any unnecessary 
disruptions to the program. Please pass S. 241.
    I want to thank Senators Snowe and Rockefeller for introducing this 
bill, Chairman Stevens and Ranking Member Inouye for signing-on as 
original cosponsors, and all of the Senators who have added their 
support to this most important legislation. In particular, I want to 
thank Senator Stevens for holding this hearing today and giving me an 
opportunity to share my views on universal service and, most 
particularly, the E-rate. I would be pleased to take any questions that 
you have.

Exhibit A
          (EdLiNC) Education and Library Networks Coalition
                                                     April 11, 2005
United States Senate
Washington, DC 20510

    Dear Senator:

    The Education and Libraries Networks Coalition (EdLiNC) greatly 
appreciates the Senate Commerce, Science and Transportation Committee 
holding today's hearing on S. 241, critical legislation which would 
permanently exempt the Universal Service Fund from a particular 
provision of the Antideficiency Act. EdLiNC is an organization that was 
formed by the leading public and private education organizations and 
the American Library Association to support the passage and 
implementation of the E-rate program as part of the Telecommunications 
Act of 1996. We commend Senators Snowe and Rockefeller, Chairman 
Stevens and Ranking Member Inouye, as well as over twenty members of 
the Senate for co-sponsoring this important bill that would effectively 
ensure that E-rate funds continue to flow to schools and libraries.
    Without prompt Congressional passage of S. 241, we fear that all 
universal service programs face the prospect of significant and 
possibly protracted funding disbursement interruptions when the current 
temporary exemption to the ADA expires in December. EdLiNC fervently 
hopes that today's hearing will help speed the passage of S. 241 by the 
Senate and spur the House of Representatives to take similarly quick 
action on this legislation. At the conclusion of the 108th Congress, 
the Senate unanimously approved the existing one-year exemption. This 
exemption expires at the end of this calendar year and would thereby 
threaten the continued flow of vital E-rate funds to schools and 
libraries.
    Since it commenced operation in 1998, the E-rate, which provides 
deep discounts to public and private schools and public libraries for 
telecommunications services, Internet access and internal connections, 
has played a leading role in connecting schools and libraries to the 
Internet. In 1998, only 14 percent of public school instructional 
classrooms were connected to the net; as of 2003, classroom Internet 
access stands at 93 percent. Nearly all public library outlets are now 
able to offer Internet access to their patrons. Private schools have 
benefited substantially, as well, with 88.4 percent of Catholic schools 
providing student Internet access. The E-rate's continuing importance 
to schools and libraries is easily observable by the fact that, in each 
funding year, requests for E-rate discounts vastly exceed the $2.25 
billion available annually. These funds are essential if schools and 
libraries are to remain connected to the Internet, the information 
super highway.
    Beyond these impressive figures, though, the E-rate is essential to 
schools and libraries for the educational and employment opportunities 
that it helps provide. A 2003 report commissioned by EdLiNC, entitled 
E-rate: A Vision of Opportunity and Innovation, found the following 
about the program:

   The E-rate is an important tool for economic empowerment in 
        underserved communities.

   The E-rate is beginning to bring new learning opportunities 
        to special education students.

   The E-rate is transforming education in rural America.

   The E-rate is helping schools improve student achievement 
        and comply with the No Child Left Behind Act.

   Schools and libraries are devoting significant resources and 
        exercising great care in completing E-rate applications.

    The story of two of the communities profiled in the 2003 report, 
the Kuspuk and Kuskokwim School Districts in Southwestern Alaska, 
provides an excellent illustration of the incomparable value of the E-
rate program. Although both of these remote, largely Eskimo and Native 
American villages are only accessible by single engine plane, 
snowmobile or boat, their students now enjoy the same online resources 
as their peers around the country thanks to the E-rate program. Because 
of E-rate supported connectivity, Kuspuk's teachers are able to 
exchange lesson plans with their counterparts in other locations and 
Kuskokwim's students are able to overcome the lack of certified math 
teachers in their area by taking online courses in math, algebra and 
geometry. As Kuspuk School District Superintendent Kim Langton 
summarized: ``E-rate funds are critical to the school and to the 
community; without E-rate funds we would be hamstrung educationally.''
    S. 241 will ensure that E-rate discounts continue to reach these 
schools and others like them uninterrupted. Last year, the program was 
suspended for three months, during which time thousands of applications 
from schools and libraries languished in the offices of the E-rate's 
administrator. This de facto shutdown of the program occurred because 
the FCC determined that a particular ADA provision, which bars federal 
agencies from obligating funds without adequate cash on-hand to cover 
those obligations, applied to the E-rate and the program's 
administrator realized that it had insufficient cash in its accounts to 
cover E-rate funding commitment decision letters. At the same time, 
concerns were expressed that the universal service high cost fund's 
projections system might also fall within the ambit of the ADA, 
potentially causing a shutdown of that program. Fortunately, the 108th 
Congress passed and the President signed legislation to exempt for 
twelve months all of universal service from that ADA provision, thereby 
allowing E-rate discounts to flow again.
    However, we are drawing ever closer to another potential crisis for 
the E-rate and universal service when the ADA exemption expires in 
December. Without passage of S. 241, the FCC would face the Hobson's 
choice of either shutting down the E-rate and/or other universal 
service programs (rural healthcare, high cost telephone service, and 
low-income telephone service) for a period of time, thus depriving 
needed E-rate discounts to deserving public and private schools and 
libraries, or raising the universal service collection rates 
dramatically, thereby virtually imposing major telephone rate hikes for 
consumers. Therefore, we urge you to preclude the FCC from making 
either of these bad choices and pass S. 241 to permanently exempt 
universal service from this single provision of the Antideficiency Act.
    We thank you for your attention to this very critical issue, and 
urge you to support S. 241.
        Sincerely,
              American Association of School Administrators
                            American Federation of Teachers
                               American Library Association
                Association of Educational Service Agencies
                           Consortium for School Networking
                     Council of Chief State School Officers
          International Society for Technology in Education
       National Association of Elementary School Principals
                National Association of Independent Schools
        National Association of Secondary School Principals
          National Association of State Boards of Education
                  National Catholic Educational Association
                             National Education Association
          National Education Knowledge Industry Association
                                               National PTA
                National Rural Education Advocacy Coalition
                         National School Boards Association
              Organizations Concerned About Rural Education
               United States Conference of Catholic Bishops

    Senator Stevens. Thank you very much. Next witness is Steve 
Hamlen, who is the President and CEO of United Utilities, Inc., 
which is in my state in an area ranging from the Bristol Bay 
all the way over to Canada. I'm pleased you could take the time 
to come down, Steve.

STATEMENT OF STEVE HAMLEN, PRESIDENT AND CEO, UNITED UTILITIES, 
                              INC.

    Mr. Hamlen. Thank you, Mr. Chairman, Senator Inouye and 
Members of the Committee. I'm Steve Hamlen, CEO of United 
Utilities. We are headquartered in Anchorage, Alaska.
    I appreciate the opportunity to appear before you today 
both in my capacity as CEO of United Utilities as well as on 
behalf of the United States Telecom Association in support of 
Senate Bill 241.
    Mr. Chairman, I know you are very familiar with my company. 
I would for the benefit of the rest of the Committee like to 
take a moment to tell everyone about United and why Universal 
Service support is so critical to my customers and company.
    United receives Universal Service Funds for eligible 
services provided to schools, libraries, health care providers 
and residents of rural Alaska. We serve a population of 
approximately 25,000 in 60 communities. United's communities 
are accessible only by air and water and our service area is 
approximately 150,000 square miles. That's comparable to the 
size of the states of New York, Pennsylvania and Ohio.
    English, science and algebra classes are now being offered 
by distance learning networks and rural communities where it's 
not been economical or feasible for school districts to provide 
a full-time instructor. Village health plans are now being 
assisted by doctors located miles away. Children, teachers and 
health care professionals are gaining access by the Internet to 
vast amounts of information and low-income households have 
access to basic telephone service at affordable rates. Clearly 
the E-rate and health care Universal Service programs have 
improved the quality of health care and education.
    All of us at USTA are well aware of the crucial role played 
by you and Senator Burns on the last night of the 108th 
Congress to temporarily resolve the crisis of applying the ADA 
to USAC. We deeply appreciate the ongoing efforts of Senators 
Snowe and Rockefeller.
    Today the agenda is on securing a strong and viable future 
for Universal Service. We believe that USAC's permanent 
exemption from the requirements of the Antideficiency Act is 
essential and that this exemption should be permanently 
codified this year. The imposition of ADA on USAC will 
undermine the delivery of telenetworking services to Alaskan 
communities.
    In Alaska, we face unique challenges in building 
communications infrastructure. When the barge leaves Seattle in 
the spring, we need to have our materials on board. Most rural 
communities get only two barges a year. Some of them get only 
one. Barge deliveries do not go past September. Air 
transportation is costly and subject to weather and some items 
like towers and buildings which weigh several tons can only be 
barged.
    Without Universal Service support, it will not be possible 
for carriers like United to maintain and build infrastructures 
in our rural communities. The application of the ADA to USAC 
will introduce uncertainty and raise havoc by disrupting 
funding to program participants.
    USAC will be faced, as it was last fall, with having to 
suspend funding applications, the processing of new 
applications will need to be delayed. Contribution factors, the 
assessment that is placed on interstate revenues to fund 
Universal Service will need to skyrocket in order to prefund 
requests. As the ADA compliance issue emerged last year, USAC 
informed us that in order to ensure adequate funding going 
forward in the first quarter of 2005, USF contribution factor 
might need to be increased by almost 50 percent.
    Mr. Chairman, Universal Service ensures that networks are 
viable in rural areas and that the networks are continuously 
upgraded and maintained--networks that reach into every 
community and provide real time communications across rural and 
urban America and across the globe.
    Consequently, it is critical that the continued viability 
of Universal Service not be threatened by applying the ADA to 
USAC. Mr. Chairman and Members of the Committee, I appreciate 
the opportunity to address you today. It is critical that the 
current 1-year suspension of the ADA from application to USAC 
be made permanent by legislation this year. Thank you for the 
opportunity to present testimony. I'm available to answer any 
questions.
    [The prepared statement of Mr. Hamlen follows:]

     Prepared Statement of Steve Hamlen, President and CEO, United 
                            Utilities, Inc.

    Mr. Chairman, Senator Inouye and Members of the Committee, I am 
Steve Hamlen, President and CEO of United Utilities, Inc. (United), 
headquartered in Anchorage, Alaska. I appreciate the opportunity to 
appear before you today, both in my capacity as CEO of United 
Utilities, as well as on behalf of the United States Telecom 
Association (USTA), in support of making the Universal Service 
Administrative Corporation (USAC) permanently exempt from the 
requirements of the Anti-deficiency Act.
    Mr. Chairman, while I know you are very familiar with my company, I 
would, for the benefit of the rest of the Committee, like to take a 
moment to tell everyone about United and why universal service support 
is so critical both to my company and our customers.
    United, an Alaskan native-owned telecommunications carrier, 
receives Universal Service funds for eligible services provided to 
schools, libraries, health care providers, and residents in rural 
Alaska. United serves a population of approximately 25,000 residing in 
60 communities. These communities are primarily inhabited by Native 
Americans, many of whom live a subsistence lifestyle. United's 
communities are accessible only by air and water and this service area 
is approximately 150,000 square miles--comparable to the size of New 
York, Pennsylvania and Ohio. English, Science, and Algebra classes are 
now being offered via distance learning networks in rural communities 
where it has not been economical, or feasible, for school districts to 
provide a full time instructor. Village Health Clinic aides are now 
being assisted by doctors located miles away. Children, teachers, and 
health care professionals are gaining access via the Internet to vast 
amounts of information. And low income households and those living in 
high cost areas have access to basic telephone service at affordable 
rates. Clearly, the E-rate, Rural Health Care and other universal 
service programs are improving the quality of life for those living in 
the communities United serves.
    USTA is the premier trade association representing service 
providers and suppliers of the telecom industry. USTA's 1,200 member 
companies offer a wide range of services, including local exchange, 
long distance, wireless, Internet, Internet Protocol video and 
telephony, and cable television service. Our membership ranges from the 
smallest rural telephone companies to some of the largest corporations 
in America. All of us in USTA are well aware of the crucial role played 
by you and Senator Burns on the last night of the 108th Congress to 
temporarily resolve the crisis of applying the ADA to USAC. Of course, 
we also deeply appreciate the ongoing efforts of Senators Snowe and 
Rockefeller. Their tireless work during the past decade is deeply 
appreciated by our members--and our customers.
    We are an organization where the agenda is set by and for the 
membership. Today that agenda centers on securing a strong and viable 
future for universal service. We believe USAC's permanent exemption 
from the requirements of the Antideficiency Act is consistent with our 
call for securing a strong viable future for Universal Service and 
freeing our companies from government micromanagement. It is imperative 
that this exemption be permanently codified this year. The imposition 
of the Antideficiency Act on USAC threatens the very survival of rural 
telephony, the availability of Internet and distance learning services 
to schools and libraries, the availability of telemedicine for health 
care, and exemplifies the need for comprehensive legislation.
    Given the rugged terrain and conditions in rural Alaska, United 
would not be able to provide these services at an affordable rate 
without universal service support. Universal service support allows 
companies like United to provide basic and advanced telecommunications 
services to all Americans, whether they are in cities such as Anchorage 
or in the most rural parts of Alaska. That is why it is so important 
that the Universal Service system continue to be viable and that 
threats to the system, such as the unnecessary application of the 
Antideficiency Act to USAC, be eliminated.
    The application of the Antideficiency Act to USAC will lead to 
overall higher consumer phone bills for all customers and dramatic 
increases in the phone bills of rural America. It threatens affordable 
service in high cost areas as well as the viability of the Lifeline and 
Link-Up Programs which provide reduced phone rates for low income 
families.
    As you are aware, due to actions by the Federal Communications 
Commission to comply with government accounting rules and the 
Antideficiency Act, last year USAC was forced to radically change the 
timing of its funds distribution. Under the government accounting 
rules, before USAC is permitted to ``obligate'' funds, it must have 
those funds on hand. Commitment letters to recipients of the schools 
and libraries and rural health care programs are considered 
``obligations'' and therefore subject to the application of these new 
standards. These programs are designed to provide Internet access, 
Distance Learning, and often telecommunications capabilities to our 
nation's schools and libraries. In addition, the program helps to 
develop a robust communications network to allow rural health care 
providers to properly diagnose and treat patients in rural America. As 
a result of the FCC's actions, USAC suspended new funding commitments 
in the E-rate and Rural Health Care programs in August 2004.
    Mr. Chairman, as you know, the Universal Service program is funded 
through an assessment, based on a ``contribution factor,'' on the 
amount of interstate revenues received by telephone companies. The 
assessment is then placed on customers' telephone bills. Consequently, 
a significant increase in the contribution factor results in a 
significant increase in every telephone customer's monthly phone bill. 
As the ADA compliance issue emerged last year, USAC informed us that in 
order to ensure adequate funding going forward, the first quarter 2005 
USF Contribution Factor might need to be increased by almost fifty 
percent.
    There is a strong indication that, if the Antideficiency Act 
exemption is not made permanent, the same ``obligation'' restrictions 
placed on funds for recipients of schools, library and rural health 
care programs would also be placed on high cost and low income support. 
This would lead to a disruption of universal service support to rural 
phone companies and a potential interruption in affordable telephone 
service to rural customers. Further, the ``contribution factor'' would 
again have to be significantly raised, possibly to over 20 percent, 
resulting in further significant increases to consumers' bills.
    Mr. Chairman, Universal Service helps to make sure that networks 
are viable in rural areas, and that the networks are continuously 
upgraded and maintained. Networks that reach into every community 
provide Internet service, distance learning, e-mail, dial tone and 
real-time communications across rural and urban America and across the 
globe. Universal Service ensures that networks will be available across 
the country to provide affordable access to the new communications 
services which all Americans expect. In fact, given the importance of 
communications to bringing technology and economic growth to rural 
America, Universal Service may be more important today than at any 
other point in our nation's history, as we transition from an 
industrial to an information society. Consequently, it is critical that 
the continued viability of universal service not be threatened either 
by the applications of the Antideficiency Act to USAC or by any of the 
other challenges facing the Universal Service system today.
    Mr. Chairman and Members of the Committee, I appreciate the 
opportunity to address you on the specific issue of the Antideficiency 
Act. The FCC's application of the Antideficiency Act to USAC threatens 
the Universal Service system and a permanent exemption is warranted. It 
is critical that the current one-year suspension of the ADA from 
application to USAC be made permanent by legislation this year.
    We support passage of S. 241. While it's April and we believe the 
Congress can develop and pass legislation that provides us with a 
secure Universal Service program as well as a regulatory regime that 
creates a level playing field for all telecom providers, we understand 
the Committee wants to move this legislation forward. This is 
especially important should unforeseen circumstances slow down efforts 
toward comprehensive reform.
    Thank you for the opportunity to present testimony; I am available 
to answer any questions.

    Senator Stevens. Thank you very much, Steve. Just a little 
bit of history so we can go back on this one. When Senator 
Inouye and I came to the Senate, he was here first, all our 
states advertisements about communications said that these 
rates do not apply in Alaska or Hawaii.
    So the rate--I do not know what was the rate paid in Hawaii 
at that time--but my allowance gave me the right to so many 
minutes of telephone calls to Alaska at the rate of $5 a 
minute. We saw the development of long distance rate averaging 
pools in the southern 48, which is what we call the continental 
48. And my colleague and I joined together to ask Congress to 
approve a resolution requesting the telephone industry to 
integrate rates so that it included Alaska and Hawaii.
    That process started voluntarily by the industry and the 
Universal Service Fund began there. That was a Fund totally 
organized by the industry, collected by the industry and 
expended by the industry. Before the 1996 Act, the FCC at one 
time decided that they ought to take over the management of 
this Fund. And I objected to that and called the GAO and asked 
them to investigate the matter, and they did decree that that 
Fund was not subject to FCC control because it was totally an 
industry Fund, collected voluntarily and administrated by the 
industry.
    Senators Snowe and Rockefeller in connection with the 1996 
Act decided to mandate that that Fund should go to, and be 
allocated in addition to just bringing long distance service to 
rural America, particularly to the offshore states, but to, and 
I think wisely the two of us joined Senators Snowe and 
Rockefeller in this, to mandate the concepts of serving 
schools, libraries and health facilities. Following that, the 
FCC in its own judgment decided to mandate the creation of this 
corporation which Mr. Talbott is now the chairman of.
    That's the best example I know of an agency trying to pull 
itself up by its bootstraps and then choking off the subject of 
its jurisdiction. This has been the result of the determination 
that the 1996 Act mandated the creation of that corporation, 
which it did not. Now we are faced, and we were faced last year 
with the problem of what to do about the FCC decisions 
confirmed by the GAO, and I think urged by the OMB, to increase 
Federal control of this money.
    The money collected is capped by a decision, I believe of 
the FCC. Well, you have heard the testimony here and I think 
there is absolutely no question that the Snowe-Rockefeller 
amendment has brought about a substantial change in America. It 
made available to rural schools and rural communities the 
benefits that telemedicine, tele-education and teleconferencing 
have brought. It has brought communities together although they 
are stretched out over 250,000 square miles. That is a 
community in Alaska, all working together to provide the 
services that are mandated by the Snowe-Rockefeller amendment.
    We are faced with a real problem. And I appreciate for 
myself the suggestion that we take some type of time to try and 
figure out what is a solution. The 2-years I don't think is 
long enough, however, Ms. Dalton. I think if Congress takes a 
lot longer than that to make up its mind and we have seen that 
in connection with our problem with the National Wildlife 
Refuge, 25 years still have not made up its mind.
    As far as I'm concerned, we need more time than 2 years. 
I'm not sure that we can get a solution right now. I'm not sure 
that we really have the ability to decide how to deal with 
these other laws which are not within the jurisdiction of this 
Committee. The only thing we have got the right to do is 
suspend the application of those laws for a while until we get 
the other legislative committees to work with us and agree with 
us that we need to find a solution to how to manage this money.
    From my point of view, Mr. Talbott has mentioned one of the 
real serious problems and that it has wisely invested in this 
fund in the past. It has leveraged collections they have made 
so they really have appreciated considerably in terms of the 
amount of money that's available to carry out the services that 
they are mandated to do.
    That leveraging factor is lost under the decisions that 
have been made by the FCC, GAO and the OMB. I have a couple of 
questions to ask and let me say to my colleagues, Senator 
Inouye and I must go manage the Defense portion of the 
supplemental bill at 3 o'clock, so we intend to ask our 
questions and then leave.
    And I hope Senator Snowe, if you will be able to stay and 
Senator Rockefeller stay and conduct the hearing for us for the 
Committee. I consider this to be one of the major issues before 
this Committee in terms of communications this year. The 
solution may be temporary, but it's going to be very important 
somehow to find a way to not lose the capabilities that have 
been brought to rural America and to our two offshore states by 
the Snowe-Rockefeller Amendment. I apologize for that long 
monologue.
    I have a few rather quick questions. One is what is the 
current balance of this Fund and how much is offset by the 
funding commitment decision letters that you have issued?
    Mr. Talbott. It's about $3 billion in the Fund. Let me 
check my notes. But it's over $2 billion that's currently 
committed.
    Senator Stevens. So unless we do something by the time we 
hit the fall, we are going to be in trouble?
    Mr. Talbott. Correct.
    Senator Stevens. Is it true that there are overcommitments 
to the program and how does that come about and why?
    Mr. Talbott. A couple of things happened. The process that 
the school districts, libraries go through takes some time. 
Technology prices if we look at it across the board come down. 
The cost for technology has come down, so there is a gap in the 
technology that schools are putting in, what they have 
requested and then they make those adjustments as they move 
forward because the vendors will give those adjustments to the 
users. And that's part of the problem.
    Senator Stevens. Is it true that the more you commit, the 
more is scored against this bill?
    Mr. Talbott. I don't understand the question, sir. Maybe 
FCC--the scoring is affected by overcommitments, right?
    Mr. Schlick. I hesitate to speak specifically to scoring, 
but in terms of the obligations, yes, the commitment letters 
constitute the obligations and therefore it's the issuance of 
the commitment letter that is counted rather than the eventual 
disbursement which occurs sometime later.
    Senator Stevens. Let me ask this of the FCC. Is there a way 
to change the commitment letters to avoid the accounting 
problems we find that have been outlined here?
    Mr. Schlick. That is an option that's been considered.
    Senator Stevens. Can it be done without legislation?
    Mr. Schlick. Yes. Those letters are issued by USAC under 
the FCC's direction, and they could be modified.
    Senator Stevens. That would take the Commission's 
concurrence, would it not, to change the rule?
    Mr. Schlick. Yes. It's one of the functions of USAC under 
our supervision. Yes.
    Senator Stevens. That would be subject to a series of 
hearings and procedures under the FCC. In other words, it will 
take time if we opted to go that direction, it will take time. 
Ms. Gelb, how long will that normally take to have a real 
change by the FCC?
    Mr. Schlick. Mr. Chairman, that's not in the Commission's 
rules now. It would be a matter of consultation between USAC 
and the agency's staff.
    Senator Stevens. Would it involve a public process to 
determine how the rule was issued by the FCC?
    Mr. Schlick. Mr. Chairman, right now the USAC commitment 
letters are not enshrined in the rules.
    Senator Stevens. The accounting change I'm suggesting, 
wouldn't that take a rule?
    Mr. Schlick. The accounting change, yes. The application of 
GovGAAP, which is the accounting rule that in October of 2003 
the Commission extended to USAC, that would require a change of 
FCC rules. But it's important to note, Mr. Chairman, that the 
accounting procedure is one that identifies the timing of the 
obligations, not the rule that USAC must have cash on hand.
    Senator Stevens. I'm talking about Ms. Dalton's problem, if 
we need a temporary fix, how long do we really need if we 
decided to go that route?
    Mr. Schlick. That rule change will not affect the 
Antideficiency Act problem, Mr. Chairman, because the 
Antideficiency Act problem is one that is statutory. The 
GovGAAP procedures are a tool that identifies the time 
obligations are incurred, but there is nothing that the 
Commission could do.
    Senator Stevens. Avoid any accounting problem but not solve 
the issues that I'm discussing, right?
    Mr. Schlick. That is correct, Mr. Chairman.
    Senator Stevens. Mr. Hamlen, in terms of this as it affects 
our state, what would be the impact on your total operation if 
the exemption is allowed to expire and Congress does not act?
    Mr. Hamlen. Well, first of all, our customers, school 
districts, rural health care providers would all be impacted. 
The impact on our company would be severe. Our ability to 
continue to deliver the services would be undermined and our 
ability to build out new infrastructure would also be 
undermined. In fact, if that were to happen, we would probably 
within a year have to go out of business.
    Senator Stevens. Last comment. By virtue of the investments 
you've made in the past, Mr. Talbott, investments of the 
surpluses as occurred temporarily, has that been a factor in 
acting to keep the contribution level as low as possible?
    Mr. Talbott. Yes, it has.
    Senator Stevens. It's up to about 11 percent now, is it 
not?
    Mr. Talbott. That is correct.
    Senator Stevens. And technically paid by long distance 
carriers primarily.
    Mr. Talbott. Right.
    Senator Stevens. Senator Inouye.
    Senator Inouye. Thank you, Mr. Chairman, for reviewing the 
history of this controversy as we approach this moment. In my 
review, I note that one cannot help but conclude that the most 
influential agency guiding policy decision making is OMB. We 
invited OMB to be with us today but they are not available. But 
I note that the FCC and GAO have all communicated with OMB. 
What have they been telling you? Can you share it with us?
    Mr. Schlick. Senator Inouye, the important communication 
for purposes of the E-rate program was the consultation that we 
had back in September of 2004, and then into the fall. And that 
was the expression of OMB's view that, first, the Universal 
Service Fund is an appropriation to which the Antideficiency 
Act would apply.
    And second, that the obligation letters, the commitment 
letters that USAC issues, are obligations that have to be 
counted under the Antideficiency Act. We have also requested an 
opinion from OMB concerning the high cost and low income 
programs under the USF and we are working with them to obtain 
that. It's our tentative view that those programs are being 
operated today in accordance with the obligations of the 
Antideficiency Act, and that the resumption of the application 
of the Act to those programs would not cause change in the 
operation of the programs.
    Senator Inouye. What was the decision of OMB in 2000?
    Mr. Schlick. In 2000, OMB determined that the Miscellaneous 
Receipts Act, which is the statute which requires that public 
moneys for the use of the United States be deposited in the 
Treasury, does not apply to the Universal Service Fund and that 
is a view under which we have been operating.
    Senator Inouye. Mr. Talbott?
    Mr. Talbott. Yes. The question comes down, my point to the 
commitment letters that we issue versus the high cost, low 
income where we do not issue the letters, but we certainly post 
it to the website. That's hard for me to differentiate when a 
company sees on the website what they will receive, but that's 
not a commitment. So I think there is an obligation from our 
vantage point.
    Senator Stevens. The money is still not in the Treasury, is 
it?
    Mr. Schlick. No. Mr. Chairman, no. The money is still 
maintained outside the Treasury.
    Senator Inouye. Ms. Dalton?
    Ms. Dalton. Senator, we were simply asked to review what 
the decisions were by OMB as well as the FCC to see if we 
concurred, which we did with their reasoning that the 
Antideficiency Act did apply in this particular situation.
    Senator Stevens. Does Congress take direction from the OMB?
    Ms. Dalton. No. It does not, Senator.
    Senator Inouye. Do we have any late message from OMB?
    Mr. Schlick. Not that I'm aware of.
    Senator Stevens. Again, my regrets to all of you. I ask 
Senator Snowe and Senator Rockefeller at this time to take over 
this matter. And it will be my hope that we can find a way to 
get this matter on the first agenda possible.

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman. I also want to 
thank the co-chair as well for giving so much support and 
having this hearing here today that emphatically I think 
indicates the support of this Committee toward resolving this 
issue and I truly appreciate it. Senator Rockefeller.
    Senator Rockefeller. They have already left. I wanted to 
duly thank on behalf of--I know Senator Snowe and myself, the 
Chairman and the Vice Chairman I guess, for their support of 
this legislation. I also note not only the absence of OMB but 
the refusal of OMB to put down in writing to us and as far as I 
can tell, to any of you, other than perhaps a couple of verbal 
things several years ago their views, even though they are 
responsible for a good deal of what has happened here. Mr. 
Talbott, a couple questions for you, sir.
    You're Chairman of USAC?
    Mr. Talbott. Yes.
    Senator Rockefeller. And without an exemption of the 
Antideficiency Act this year, what would you say you need to 
recommend to the FCC for the first quarter of 2006 to fully 
fund all four of the Universal Service Fund programs, that will 
be the E-rate, the high cost, the low income, and rural health 
care?
    Mr. Talbott. Well, if we did not have the passage of the 
Act--let me back up. The commitment letters that were addressed 
earlier, we have a softer commitment letter that was one thing 
that was suggested this past year. But what we found out when 
the auditors started looking at it, the school district started 
looking at it, it did not hold water. We either have to raise 
the contribution factor up significantly which is an impact on 
everybody or we have got to figure out a way to fund it. And 
that way would be to shut down for X amount of time so we can 
build the Fund up.
    Senator Rockefeller. Ms. Abshire and Mr. Hamlen, both of 
your testimony I thought were absolutely superb, but that's no 
surprise. But would that not also then increase the hesitancy 
of those particularly rural schools and areas because of the 
inconsistency being shown by Congress in funding this program? 
That when you shut things off and turn them on and shut them 
off and turn them on, people begin to walk away from it just a 
bit, don't they?
    Ms. Abshire. Yes, sir. I think the key is the constant flow 
of funds that those of us in districts can count on and use to 
plan. We have had a lot of education and technology funding 
plans and budgeting and we have tried to be wise and build 
plans that take us into the future and leverage resources in a 
very strategic nature. And when we have issued this start and 
stop, it really disrupts all of the planning processes and 
makes people reluctant to be engaged, in addition to the 
educational disruption that occurs.
    Senator Rockefeller. Mr. Hamlen, you don't need to answer 
because you answered most eloquently when you said you'd have 
to shut your business down in about a year and a half?
    Mr. Hamlen. That is correct, Senator. I would like to add 
one more item. Many of our school districts in rural Alaska 
receive 90 percent subsidy and the cost of providing service to 
these remote schools is very high. And you'll note that some of 
them could, if we have these disruptions and they continue to 
try and receive service and they become liable for the full 
bill, could be forced into bankruptcy. So that that would be an 
added concern.
    Senator Rockefeller. Thank you. I'm going to try and ask a 
couple of questions quickly before Olympia red lights me. Mr. 
Talbott, I'll go back to you, sir. Were there any costs that 
you are aware of in complying with the FCC guidance last fall? 
Are there any ongoing costs of compliance with the FCC?
    Mr. Talbott. Yes, the cost to implement GovGAAP, we lost 
$4.6 million when we had to liquidate investments. We have 
already put one million into training. It's going to cost us 
millions more to complete that system overall and we have lost 
$4.1 million per year in interest over this next year.
    Senator Rockefeller. Senator Inouye touched on this, but I 
want to do it again. I'm interested in an explanation as to why 
hundreds of millions of dollars are now sitting in non-interest 
bearing accounts, that are buried in a hole, rather than safely 
earning interest for the purposes of America's school children.
    Some of us here in Congress went through a lot of effort 
late last year, and Senator Inouye indicated two of those 
folks, to pass emergency legislation to end such wasteful 
practices. This legislation granted the Universal Service Fund 
a 1-year exemption from the Antideficiency Act expressly for 
the purpose of permitting the FCC to act as a prudent steward 
of these public resources while we all addressed a more 
permanent solution.
    I agree with Senator Inouye that a 2 or 3-year solution is 
insufficient because of the nature of Congress and the nature 
of the situation. The FCC, however, has done nothing to 
prudently invest these funds, these non-interest bearing 
account funds. And the delay is costing the public millions of 
dollars in forgone interest every month, is that not the case?
    Mr. Talbott. That is correct. And we are working within 
USAC. In fact, next week the investment committee will be 
working with the board and trying to make changes there, but we 
have a letter that states that we are not to proceed with those 
types of investments that you just described and we have to get 
FCC to allow us to do that. It's a rule.
    Senator Rockefeller. My final question is to you, Mr. 
Schlick. What is the agency doing to restore the $550 million 
that was undercollected for the E-rate program in 2004?
    Ms. Gelb. At this time, we have not actively collected the 
$550 million. In part, the 1-year ADA exemption permitted us to 
not have to collect that immediately, so right now there is 
incomplete collection of that amount.
    Senator Rockefeller. I missed it. It was not collected?
    Ms. Gelb. It has not been recollected.
    Senator Rockefeller. It has not been recollected.
    Ms. Gelb. Yes.
    Senator Rockefeller. Thank you, Madam Chair.
    Senator Snowe. Thank you, Senator Rockefeller.
    Senator Nelson.

             STATEMENT OF HON. E. BENJAMIN NELSON, 
                   U.S. SENATOR FROM NEBRASKA

    Senator Ben Nelson. Thank you, Madam Chairwoman. I must be 
a little bit confused here. Mr. Schlick, did the FCC ask for an 
opinion from OMB? I think you said no. So did OMB volunteer it 
about the Antideficiency Act application to this Fund?
    Mr. Schlick. Senator, the FCC did ask for such an opinion 
and such an opinion has been provided. And it is the view of 
OMB, as well as now later of GAO, that the Antideficiency Act 
does apply.
    Senator Ben Nelson. Now, is that standard practice on any 
other funds that you collect other funds? Are you custodian of 
any other funds that have to be collected and distributed?
    Mr. Schlick. I don't know the answer to that question. 
There is nothing closely analogous to USF. I don't know the 
answer to that question.
    Senator Ben Nelson. I'm a little confused, also, Ms. Gelb, 
about what is the--you used two collections. You said one, has 
been collected or it's collected again?
    Mr. Schlick. That's the high cost and low income program 
within the Universal Service Fund. The operation of those 
programs within the Universal Service Fund is very different.
    In the E-rate program, which is the one that had the 
problem last fall, USAC issues commitment letters which say to 
the recipients, this is what you will receive and how much 
you'll receive. In the high cost and low income programs, USAC 
does an initial projection quite far in advance of what the 
expected revenue needs for the program will be, then services 
are provided, then carriers pay into the Fund in their monthly 
contributions. And some days after that, USAC authorizes 
disbursements to the carriers.
    So for two reasons, one being that there is no definite 
commitment to issue funds that's equivalent to the E-rate 
commitment letters, and also because the funding flows are 
requiring carriers to put money into the Fund before USAC pays 
out. For both of those reasons, we think that the high cost and 
low income Fund is now being operated in compliance under the 
Antideficiency Act. We did ask OMB for an opinion and we did 
advise USAC of our views last September.
    Senator Ben Nelson. But the other opinion that they gave 
you that was referenced earlier, apparently an oral opinion, 
not even a written opinion?
    Mr. Schlick. On the high cost, low income we have not 
received a written opinion from OMB. That is correct, Senator.
    Senator Ben Nelson. Also, I'm a little concerned about the 
lack of investment. Mr. Talbott, you said you have a letter and 
the letter is from whom or from what agency?
    Mr. Talbott. From the FCC, the Wireline Bureau.
    Senator Ben Nelson. About not investing the money?
    Mr. Talbott. No.
    Senator Ben Nelson. Mr. Schlick, why would you tell them 
not to invest the money. Usually there is very little, if any, 
risk associated with it and I guess we did at one point invest 
the money in the long term, and had to liquidate that lost 
money because of the early liquidation. It seems to me that 
somewhere along the line, we would figure out how to get it 
straight.
    Mr. Schlick. Senator, it's not a situation of investment or 
no investment. Under the Antideficiency Act and again under the 
OMB guidance implementing that, which is something called 
circular A-11, amounts that are in Federal Government 
securities are treated as available cash for purposes of the 
Antideficiency Act.
    So when we issue a commitment letter if we have investments 
in Federal securities or literally as cash, those may be used 
to offset the commitment letter and therefore ensure compliance 
with the Antideficiency Act. If the moneys are invested in 
investments other than Federal securities, then the holding of 
those investments is itself viewed as an obligation of the 
government, so they may not be treated as available cash for 
purposes of offsetting the commitment letters.
    The result of this is that, because under the law as it now 
stands on January 1, 2006 the Antideficiency Act will begin to 
apply to the Fund, we have told USAC that unless they obtain 
approval from us, they should not reallocate their portfolio 
out of investments that can be considered cash for purposes of 
offsetting obligations under the Antideficiency Act into non-
Federal investments that cannot have that status. And the 
reason for doing that is to prevent the kind of shock that we 
had last fall where there was not available cash in the Fund to 
offset the commitment letters.
    Senator Ben Nelson. So if this amendment passes, will we be 
able to earn some money for the kids and people that are going 
to receive the benefits in Louisiana, Alaska and hopefully 
Nebraska, Arkansas and everywhere else?
    Mr. Schlick. Yes, sir. I think it's a fair assumption that 
the interest will increase.
    Senator Ben Nelson. There was another question relating to 
that. But I think I was trying to follow about you have not 
decided about investments yet. Is this the same Fund or another 
Fund that I'm not familiar with?
    Ms. Gelb. Sorry, I wasn't clear. The question Senator 
Rockefeller asked me was whether we had collected the $550 
million that was not collected in 2004. In 2004 at the 
beginning of 2004 we worked with the USAC, and USAC agreed that 
there was substantial buildup of cash in the Universal Service 
Fund. And rather than continue to collect the full amounts 
needed in the contribution factor, that there would be a 
reduction in contribution factor and some of the existing cash 
surplus will be used instead.
    This was--decision was made before the issue of the 
Antideficiency Act arose. The question was whether we had since 
collected that $550 million and the answer is no, we have not 
at this time collected that $550 million that we did not 
collect in 2004.
    Senator Ben Nelson. I must be missing something here as 
well. Why would that be that we have not collected it?
    Ms. Gelb. I think largely because the 1-year exemption on 
the Antideficiency Act gave the Fund flexibility to use 
existing stores of cash to fund the program and we did not need 
the full amount of cash on hand in order to make all of the 
commitments.
    Senator Ben Nelson. But if we did not pass the bill that I 
think we are going to pass, and antideficiency did apply, is it 
not possible that we would run out of money if we did not go 
ahead and collect what we have not recollected or whatever it 
is?
    Ms. Gelb. Yes. I think that if the exemption to the 
Antideficiency Act ends, then we would over time, I used the 
word re-collect, but collect the $550 million that was not 
collected previously in 2004.
    Senator Ben Nelson. I'm not in favor of collecting a lot of 
money to hold in storage, but I am a little perplexed that a 
decision would be made not to collect what is due and owing 
with the expectation that one way or the other it's going to 
have to be paid out. Is this a decision the Commission made or 
is it staff driven?
    Ms. Gelb. It wasn't a decision that the Commission made. I 
guess the answer to your question is that there are cash 
reserves to pay out the funds. The issue arises when because 
there is a lag between when the money is committed and when it 
is disbursed, there will be money at that time necessary for 
disbursement. So if the Antideficiency Act exemption were to 
continue, what we would need would be the cash on hand at the 
time of disbursement, not necessarily the cash on hand at the 
time of commitment.
    Senator Ben Nelson. Just one follow-up, Ms. Dalton. Did you 
reference that in your GAO report by any chance as you looked 
at this issue?
    Ms. Dalton. I addressed it very briefly in my statement 
here today. What we were talking about is looking at the 
scenario that occurred in 2004 and the fact that the money 
wasn't available under the definition under the Antideficiency 
Act. However, Congress can specifically say that certain 
resources are budgetary resources and are applicable under the 
Antideficiency Act. For example, the investment funds could be 
considered as budgetary resources.
    Currently under the Act, without special authorization, the 
money has to be in Treasury or in cash to be considered a 
budgetary resource. However, Congress can in fact say very 
specifically that certain investments or anticipated 
investments in this particular case should be considered as 
resources to balance out the commitments.
    Senator Ben Nelson. But you still have to collect them?
    Ms. Dalton. You do.
    Senator Snowe. Thank you, Senator Nelson. At this point, 
I'll take my turn with respect to questions. It truly is 
confounding to understand exactly why we are confronting the 
situation we are that really does have many consequences to the 
programs at stake.
    And certainly, it comes without explanation or rationale 
from the Office of Management and Budget, and I certainly note 
the absence of OMB here today which would certainly have been 
helpful to have their perspective with respect to the impact of 
the direct and net effect of their directive. With respect to 
the E-rate program and the overall Universal Service Fund, Mr. 
Talbott, let me begin with you.
    Have you had direct conversations with OMB with respect to 
the impact and the consequences of these actions prior to the 
exemption that was passed by Congress?
    Mr. Talbott. No.
    Senator Snowe. Have you had any since?
    Mr. Talbott. No. We have not.
    Senator Snowe. So no explanation at all?
    Mr. Talbott. No. We administer the program, the FCC would 
communicate that to us I assume.
    Senator Snowe. Mr. Schlick, have you?
    Mr. Schlick. The Commission was consulting on these 
problems with OMB in September of 2004 which was after USAC had 
stopped issuing commitment letters. So OMB was very much aware 
of the practical problem that we faced there and that's why we 
went to OMB and asked urgently for guidance. So they were 
aware.
    Senator Snowe. They were aware. Did they have any explicit 
explanations and responses to the problems that are associated 
with the implementation of their directive? I mean, realistic 
acknowledgment of the practical effect?
    Mr. Schlick. I don't want to characterize their views, but 
I think it's fair to say that they were, of course, aware of 
the problem. They were viewing the issue as one of applying the 
statute, the Antideficiency Act and precedents under it. As 
were we. And that's what was guiding us in reaching the same 
conclusion that GAO has now arrived at.
    Senator Snowe. Were they aware of the ruling that was made 
by OMB in 2000 with respect to these funds. It was totally 
contrary to their view obviously. Were they aware of that 
ruling?
    Mr. Schlick. Yes, Senator. They were aware.
    That of course arose under a different statute, the 
Miscellaneous Receipts Act which involves deposits into the 
Treasury rather than the Antideficiency Act.
    Senator Snowe. And that a court ruling that indicated that 
the USF funds were not a tax? They were not derived from tax 
revenues.
    Mr. Schlick. I believe----
    Senator Snowe. It's not an appropriation.
    Mr. Schlick. I believe those core decisions were part of 
our discussions.
    Senator Snowe. They were. And how did they recognize that? 
How did they acknowledge the core decision?
    Mr. Schlick. Again, Senator, it's my own view now. That's 
really an issue that goes more toward the character of the Fund 
under the Miscellaneous Receipts Act and the Antideficiency 
Act. Under the Antideficiency Act, once OMB, GAO and CBO all 
treated the Universal Service Fund as an appropriation, it was 
that back in late 1990's that triggered the application of the 
Act.
    Senator Snowe. Well, obviously it is not an appropriation 
in the final analysis. It is not. I mean, you know, you can 
call it whatever you want--the reality is and that's the 
frustration with the directive that has been imposed by OMB--is 
not acknowledging the net practical effect of what has occurred 
here. Already the loss of dollars is hard to understand. I 
mean, obviously in withholding the commitments, and you have 
had to redeem bonds, did you not, Mr. Talbott, which cost more 
than $4 million to the Fund?
    Mr. Talbott. As well as certainty to the program.
    Senator Snowe. You cannot put the funds in an interest 
bearing account, even a modest interest bearing account. You 
cannot do that. And what is the explanation for that? Does 
anybody have one? Mr. Schlick?
    Mr. Schlick. Investments that are not Treasury securities. 
So interest can be earned although it has to be a Federal 
security. And the answer to that is that if you--under OMB 
guidance, the circular A-11--if you're purchasing an investment 
asset outside of the Treasury that's viewed as itself an 
obligation of government funds.
    Senator Rockefeller. Senator, I'm just stunned by that 
answer. I apologize. No loss of your time, Madam Chairwoman, 
but the OMB said that you could not do this because it could 
not work out financially. I'm confused as to your 
responsibilities and the FCC's and OMB's responsibilities.
    Mr. Schlick. Certainly, Senator. OMB establishes executive 
branch-wide guidelines and one of those guidelines is that 
investments in non-Federal securities are, for purposes of the 
Antideficiency Act, generally treated as an obligation----
    Senator Rockefeller. Senator Nelson indicated they could be 
in government securities.
    Mr. Schlick. Yes. And my understanding is that a portion 
are. But perhaps Dr. Talbott can correct me on that. My 
understanding is that a portion right now are in government 
securities earning interest.
    Senator Rockefeller. Thank you.
    Senator Snowe. Thank you, Senator Rockefeller. So what has 
been the net cost so far as a result of this OMB directive? Is 
it four million?
    Mr. Talbott. We lost 4.6 million in the 3-day period when 
we got the order to liquidate by the end of the Fund year--
because we were directed to do that on September 27th and of 
course, October 1 is the new fiscal year. So we had to 
liquidate. We lost 4.6 million there and then sequentially, we 
have lost for each quarter significant dollars that we have 
earned.
    Senator Snowe. That you could have earned.
    Mr. Talbott. Could have earned.
    Senator Snowe. Have these issues been raised by OMB in the 
subsequent time in which this legislation was passed? I mean, 
have you raised this at all about the loss?
    Mr. Schlick. No. I don't think we have. Under our direction 
from last December to USAC, they are to come to us first with a 
proposal to reallocate and this may be a good time to note that 
there is no prohibition on investments outside of Federal 
securities or cash. It's simply to protect ourselves against 
the Antideficiency Act, we have to have enough that's treated 
as cash there.
    Senator Snowe. You have to have a portion of your portfolio 
in cash?
    Mr. Schlick. Enough to cover the commitment letters.
    Senator Snowe. Well, maybe they should apply the ADA to 
common sense because in the final analysis, I mean, it is not 
only creating an uncertainty to a program that has worked 
exceptionally well over time. Not to say it hasn't had 
problems. Not to say that the FCC doesn't have the authority to 
conduct audits which you are doing. Obviously there are issues, 
but for someone to arbitrarily impose this dictate that has 
created enormous consequences for the E-rate program and high 
cost and low income, which if we do not address this issue for 
the long term, a tremendous price and penalty will be imposed, 
as I understand it, to gather a surcharge, 21 percent, will be 
doubling?
    Mr. Talbott. That is correct. USAC holds with maturities of 
less than 90 days and we have one long-term U.S. Treasury note 
that's being held. That is correct. It not only brings about 
uncertainty but also--it increases the contribution factor.
    Senator Snowe. It's going to double the surcharge in 
addition to what it has already been raised--from 8.7 to 10.9 
percent. So all combined, you know, it wreaks havoc on this 
program. As a result of an arbitrary ruling without having the 
ability to sort through what we can do to plan even in the long 
term. I mean, that is the issue here is that it was summarily 
imposed without any opportunity to respond, to react, to try to 
address.
    And so obviously, we have a temporary approach, but clearly 
it needs to have a permanent exemption so we can address the 
long term, address other issues regarding the Universal Service 
Fund because we know that there is declining revenue from long 
distance carriers and so on, there are a number of issues. But 
this has clearly been an obstacle and impediment of a program 
that has served this country well and schools and libraries as 
we have heard from you, Ms. Abshire, as well.
    We ought to look at the long term to figure it out. But to 
have to respond in this fashion it clearly does not make any 
sense. That's what I regret about it because we have to be able 
to sit here and rationally work out solutions to problems. And 
if somebody has a better idea on how to do it, fine.
    But I think to simply impose this without recognizing--by 
the way, numerous other agencies that are exempt from the 
Antideficiency Act. It's not just the USF. There are other 
agencies. Highway Trust Fund, U.S. Information Agency, National 
Park Service, Fish and Wildlife Program, National Insurance 
Development Program, probably many more. It's not as if this 
has always applied and the uniqueness of this program should be 
recognized. Everybody wants to live by good government 
accounting principles obviously. So how can we solve the 
problem to get to the same net result without imposing or 
wreaking havoc on this valuable program.
    Senator Sununu?

               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you, Madam Chair. I have a decidedly 
different view and I would like to begin by encouraging my 
colleagues that if this bill passes, and I do hope it doesn't 
pass, that they show the same enthusiasm for allowing Americans 
to invest their payroll taxes in interest bearing private 
accounts that we have shown here for investing schools' and 
libraries' money in private interest bearing accounts.
    My sense is, though, that that's not going to happen.
    We'll find a reason for avoiding any kind of equivalency. I 
do think exempting the program from accounting statutes as a 
general premise is not sound policy. And when you have a 
program that has had the problems of the schools and libraries, 
I think that's particularly the case.
    We have not, this is not a hearing about fraud, 
mismanagement, overcharging, misapplication of funds within the 
E-rate programs, overbuilding, gold plating some of these 
investments. That's not what this hearing is about. But we all 
know that these things have occurred in this program to a much 
greater extent than I think anyone in this room would like to 
see.
    At this point in time, the fact that we are asking the 
program to operate under this existing accounting standard and 
that we are looking at Universal Service Fund reform, I think 
creates an opportunity to address all of these programs as we 
mark up a telecommunications bill. And I do not think we should 
just exempt this in perpetuity so that the funding can continue 
to come in and go out without the kind of oversight and 
inspection that we would expect of a very large program like 
this. It's $2.25 billion a year.
    So I see this as an opportunity to force the issue to make 
us look at not just the E-rate but all of Universal Service 
Fund. In fact, we were told when this temporary extension was 
passed at the end of last year that this was just the temporary 
extension because we were going to look at all of these issues 
in conjunction with the reform of the Universal Service Fund. 
And here we are just 3 months later and suddenly, everyone has 
forgotten about that commitment.
    Second, we were told that the single most important reason 
for extending or providing the waiver of the Antideficiency Act 
was to avoid an increase in the contribution factor and lo and 
behold 2 months later the contribution factor is increased any 
ways.
    So I have heard some practical arguments for extending the 
waiver, that is, arguments that it will make us operate a 
little bit differently, force us to find ways around the 
restrictions as a practical matter, but no real principaled 
argument for why this program should be treated so uniquely. 
And I think I'll at least begin there and perhaps it was in the 
testimony and it's something I may have missed. I'll be the 
first to admit. Mr. Talbott, though, why don't I begin with 
you. I think in your testimony you said that you support the 
application of accounting rules to USAC, just not this one.
    What is it about the organization or the program that's so 
unique that you should be exempted from this standard?
    Mr. Talbott. Let me say that under GovGAAP accounting which 
we are moving to, we are doing that. We will be under GovGAAP 
accounting. What it is is whether or not the commitments or 
obligations are not, and that is the point where this piece of 
legislation solves the problem for us.
    Senator Sununu. I recognize the fact that it solves the 
problem for you. But what is it about you that's so unique that 
it should be exempted from this?
    Mr. Talbott. I think it's the impact on the schools and 
libraries. If there is no ADA exemption, there will be 
uncertainty. The poorer schools get hit first. The budget 
process is impacted. Schools may have to discontinue services 
which actually happened previously.
    Senator Sununu. Are you suggesting that you won't be able 
to spend $2.25 billion in schools and libraries in the coming 
funding year.
    Mr. Talbott. I have to have it on hand.
    Senator Sununu. But at the end of the year, will you spend 
$2.25 billion on libraries and student issues?
    Mr. Talbott. Absolutely.
    Senator Sununu. The year after that?
    Mr. Talbott. I have to have it in the bank.
    Senator Sununu. And the year after that?
    Mr. Talbott. Yes.
    Senator Sununu. And the year after that assuming nothing 
changes?
    Mr. Talbott. Yes.
    Senator Sununu. I appreciate the challenge of dealing with 
the restraints and I certainly appreciate the degree to which 
this has provided the benefits to school districts represented 
here, but the fact that we have spent money and made a 
different standard does not in an of itself justify spending 
$2.25 billion.
    I could have $2.25 billion and waste half of it and make a 
heck of a difference with the other half, but that doesn't 
necessarily mean it's a well run, well administered program. 
And I think a lot of efforts have been made to do better, to 
allocate these moneys better and I appreciate the participation 
of the school districts for whom it has made a difference.
    But I think it makes it all the more important that we look 
at reform in the context of Universal Service, which is another 
$4 or $6 billion we provide to districts just like Ms. 
Abshire's, those with a high cost profile and those with a low-
income profile and I would very much like to see them all 
considered together.
    Mr. Hamlen, one question for you, you're a provider, 
correct?
    Mr. Hamlen. Yes.
    Senator Sununu. You're, I'm sure, very unique. My guess is 
we cannot find an operation in New Hampshire that looks 
anything like yours and that's sort of a tribute to you. But I 
think the question I have applies not just to you but to 
others.
    Is it your contention, let's say, hypothetically the entire 
schools and libraries program went away. Is it your contention 
that you would not be able or willing to offer any discount to 
any school or library that came to you for service? You'd be 
forced to charge them the same rate that you charge any 
business or consumer?
    Mr. Hamlen. Yes. We would. The schools and libraries, the 
health care providers receive a discount. I'll give you a good 
example. We just won a contract to, under the rural health care 
program to provide telemedicine services to 47 clinics that do 
not have telemedicine services today.
    Now, we need to build out a network that will provide that 
service which will cost a substantial amount, takes a long time 
to do that. What is driving the buildout of the network is the 
rural health care program and the funding that is available to 
the health care provider to be able to purchase that service, 
and enable the telemedicine services at those clinics. So these 
networks that we have in rural high cost areas are dependent on 
the USF support because they cannot be built.
    Senator Sununu. Thank you. I see my time is up. Thank you, 
Madam Chairwoman.
    Senator Snowe. Senator Pryor?

               STATEMENT OF HON. MARK L. PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Madam Chair. I'd like to follow 
up on a couple of my colleagues' questions here, first with 
regard to some of Senator Rockefeller's questioning about the 
watering down of the commitment letter that you all answered. I 
believe that was you, Mr. Talbott, that answered that. But I'd 
like to hear if I could from Ms. Abshire on that. I'd like to 
know the practical ramifications of that.
    Ms. Abshire. Yes, Senator. When that first was considered 
last year, it was met with dismay by people in my position.
    Senator Pryor. Why is that?
    Ms. Abshire. In order for me to be able to seek budget 
funds for a non-discounted portion, I have to have a commitment 
to be able to give to my board that tells them that we are 
contracting only for the non-discounted portions. And so when 
that first came up, there are many of us around the country 
that explored that and spoke to legal counsel in our districts.
    And we were informed that unless we had a firm funding 
commitment that enabled us to go to that board and say that the 
discounted portion would be covered by E-rate, and our board 
needed to approve the non-discounted portion, that we were 
really left in a very unclear area, and that we were very 
reluctant to do so. We did explore that when that concept was 
put forth last year.
    Senator Pryor. As I understand it, I think it's consistent 
with what Mr. Talbott said is that in effect the watering down 
makes it basically unworkable for you. Is that fair to say?
    Ms. Abshire. Yes, sir. That's fair.
    Senator Pryor. Mr. Talbott, in connection with Senator 
Sununu's questions a few moments ago, basically as I understand 
your answers, you said you needed the cash on hand before you 
could distribute funds, is that right?
    Mr. Talbott. Right now. Not right now because the 
Antideficiency Act--because of the exemption we got. We would 
have to have those funds and I did misspeak when I supported 
the change because we administer the program. And through my 
enthusiasm to get dollars out the door to applicants and 
vendors, I overstated the support because we are not in a 
position to say support. Not support. I just wanted to clarify 
that for the record.
    Senator Pryor. In other words, you were talking about the 
possible need for cash on hand that you actually had to have 
the money in the account before you could distribute it?
    Mr. Talbott. Had to have the money in the account before we 
could distribute it. We needed the money there in the accounts 
at the time the obligation was made, the cash has to be on 
hand.
    Senator Pryor. And I guess what Senator Sununu was asking 
was, what is the problem with that? Why is that a problem?
    Mr. Talbott. It's a problem because we have with the cash, 
when we say we have $3 billion on hand, that's committed but 
it's committed out over a period of time. So we would have to 
raise that to $6 billion in order to take care of all of the 
obligations that we have, rather than paying it out as it comes 
in.
    Senator Pryor. And I guess, Ms. Abshire, maybe this is best 
for you, is timing important with these requests? I mean, are 
these time sensitive requests?
    Ms. Abshire. Well, they are really critical in terms of 
educational opportunities. One of the things that was such a 
derailing piece of our planning was when we had planned the 
infrastructure upgrades and put educational programs in place 
to support the upgrades and we were not approved.
    The real key is that 471 process that has all the due 
diligence involved in it to make sure that we have properly 
contracted services, that they are eligible. And that that 
pristine 471 process gives us the approval, and then allows me 
to move forward with engineering work and deployment across a 
very large and diverse district, and put education programs in 
place that are going to meet educational needs.
    So the timing is everything in planning because that's what 
we have been asked to do is to plan wisely, strategically use 
resources and deploy them for increased educational 
opportunities. Yes, sir.
    Senator Pryor. Let's talk about the educational needs 
because now we have No Child Left Behind. Did the E-rate 
program, does it help your schools, does it help schools make 
the annual yearly progress requirement in No Child Left Behind?
    Ms. Abshire. For us it has, yes, sir. We have been able 
to--again, it's the strategy of using all the different 
resources that we are provided to be able to have the 
connectivity. And then we have used other funds to train 
teachers and administrators how to use that connectivity. 
That's been the key piece.
    So that students then, when they are engaged in these types 
of activities in classrooms using the connections and using the 
vast resources on the worldwide web, that they are used for 
highly skilled educational endeavors.
    And our communities, our business and industry and folks 
that are involved in economic development tell us over and over 
again, we need students that leave our schools that know how to 
work in these collaborative environments and that are really 
information literate. And if we don't have the connectivity to 
model these types of lessons and engage students in these types 
of activities, we will provide substandard opportunities for 
them.
    Senator Pryor. Mr. Schlick, let me see if I can change 
gears and ask you again, if I may, and again touching on 
something Senator Sununu mentioned a few moments ago or he 
basically talked about some misuse of funds or he used the term 
gold plating. I'm concerned about fraud and I think you 
mentioned that as well. In your opinion, does subjecting USF to 
the ADA, does that help prevent fraud?
    Mr. Schlick. No. The waste, fraud and abuse issue is a 
different one than this question.
    Senator Pryor. So in other words, it's not connected, the 
two are not connected in your view?
    Mr. Schlick. That is correct.
    Senator Pryor. I guess that's a little bit counterintuitive 
to me. Could you walk through that, please?
    Mr. Schlick. The waste, fraud and abuse issues that we are 
acting very aggressively against concerned the requests for 
money and the uses of money. That's essentially the 
relationship between USAC as the administrator and the 
recipients of the funds--the schools and libraries. And we are 
talking about providers that are providing their services.
    If it would help, I can give some examples of the kinds of 
things we are doing to address those problems. Five things in 
particular. We are working very hard with the Department of 
Justice to have aggressive civil and criminal enforcement 
against those who abuse the program, to enforce the laws and 
protect the program.
    We have expanded our own FCC audit program for the E-rate 
program under the direction of the FCC Inspector General. We 
have added additional FCC staff to oversee the program, and I 
know that's directly responsive to one of the recommendations 
of GAO in their report that was released last March.
    We are working now with OMB to develop performance measures 
for the E-rate program to measure the effectiveness of the 
dollars we are spending. Again, that's directly responsive to 
one of GAO's recommendations and we are providing USAC 
additional guidance concerning the operational issues of the 
program and details of the implementation we think can protect 
the program funds.
    Senator Pryor. Thank you, Madam Chair.
    Senator Snowe. Senator Rockefeller?
    Senator Rockefeller. Thank you, Madam Chair. I just want to 
follow on a little bit of what Senator Pryor was questioning. 
I'm going to wander a bit in making this point which is very 
unusual for me.
    I joined the Peace Corps when it was first started up in 
1961 and 1962. And I think most people would agree these days 
that one of the great things that's happening in this country 
has been the United States Peace Corps, what it's done for our 
country's understanding of ourselves and our understanding of 
ourselves as individuals.
    I cannot possibly underestimate to you, however, the amount 
of waste, not necessarily fraud and abuse because that was not 
the intention, but I was at that point the director of the 
Peace Corps program in the Philippines which was the largest 
one. Had 400 teachers going to 400 Philippine schools with the 
exception of the fact that when the 400 got there, there are 
about 100 schools missing.
    Now, one can draw conclusions from that philosophically. 
One can say, well, there goes the U.S. Government messing up 
again. Or one can say, well, there is an entirely new program 
we were sitting around on the floor basically with a lot of 
paper trying to figure out what to do to startup something that 
should never have taken place in this country before, and it 
did not start easily. It did not start easily and we made 
mistakes and we continue to make mistakes.
    I can take you through 35 different mistakes that we have 
made that were corrected as the program matured. For example, 
we used to say the rule used to be that anybody, in order--
everybody went to training camp. It was the Philippines. It was 
out in Hawaii, which was similar in some respects to what they 
would expect to live in.
    And the rule then was you have to show that you're--you 
have to show that you cannot do the job in order not to qualify 
to be a Peace Corps volunteer. Very low disqualification rates. 
All kinds of people were getting in all kinds of trouble, 
extreme moments of extreme happy, wrong people marrying the 
wrong people. All kinds of bad things.
    So we just said you have to show that you can handle being 
a Peace Corps volunteer, or else you'll be eliminated from the 
program which then eliminated 44 percent of all trainees. Those 
are lessons learned from the program that is just beginning, 
these two that I reflect on having in the first two years.
    You know, Medicare, boy, I'd love to do a study on waste, 
fraud and abuse on Medicare, and I say this with all due 
respect to Senator Sununu, who I greatly respect for many 
reasons, that there it's systemic. There are CDs that are sent 
around to physicians saying how you could take advantage of 
Medicare rates and get more for your money, et cetera. I think 
that would be a little harder to do these days but 
nevertheless, that was endemic.
    And yes, it is true I can remember as can Senator Snowe 
when the first head of USAC had to resign because the Congress 
in our infinite wisdom and then carried by some real examples 
where there was vendor waste, fraud and abuse, et cetera. These 
stories caught on and this poor fellow who was absolutely 
terrific had to resign. He just flat-out had to resign and he 
was very good at doing his best. And you remember that, and it 
was a tragic circumstance.
    I would then say that the coverage of classrooms has gone 
from in 1996 and 1997, probably when the program began or maybe 
1998 when it was actually put into effect, from 14 percent of 
classrooms to 93 percent of classrooms, in just over 6 or 7 
years. This is absolutely phenomenal.
    California started off with 15 percent of their classrooms 
covered and they are now up to--Houston had zero through 
wireless, they are now up to 100 percent. And so the story on 
the good side is so much better than virtually any other 
government program that I can even think of. I'm forced to look 
at the public good as well as the problems.
    You, Mr. Schlick, have detailed and I was going to ask you 
this question, some of the things that the FCC and USAC and you 
have made rule changes. And you are doing things, both of you, 
to make major changes that are ongoing. They have been ongoing. 
They continue to be ongoing. When your funding continues to be 
terminated, I would think you would tend to ongo with it.
    Then I would make the final point, Madam Chair, that waste, 
fraud and abuse is not accomplished or found in the U.S. 
Government. The money sits in the government and then it's sent 
out to the schools. And sure, there was a period of time and 
there may still be like some examples of where schools that 
have not handled this before, little schools in rural parts of 
Alaska or Louisiana or West Virginia, where they are not used 
to handling the paperwork, where it's like you are going to get 
a grant from the government you better have somebody that can 
write a grant. And nobody ever does in rural communities.
    And the same thing when you're starting up a program. You 
make a mistake or a vendor takes advantage of the fact that you 
cannot do it properly, and those things do occur. Nobody is 
denying that. But if you're correcting them virtually all of 
these areas are now covered, and the benefit to the United 
States is I think immeasurable. And once again, as you said, 
Mr. Schlick, that the nonpassage of the ADA or the passage of 
the ADA, either way, would have absolutely nothing to do with 
waste, fraud and abuse.
    Mr. Schlick. That is correct, Senator. The Antideficiency 
Act is essentially a budget mechanism, the purpose of which is 
to prevent Federal agencies from coming to Congress in need of 
additional money because they have overobligated. Here, of 
course, contributions are made by the industry rather than by 
direct congressional appropriation, and that's the thrust of 
the Act, which is different from the focus on how the moneys 
are used once they are made available.
    Senator Rockefeller. Thank you, Madam Chair.
    Senator Snowe. Thank you, Senator Rockefeller.
    Just to followup on a couple of issues because I think it 
is important to clarify to some extent, and I know that it's 
somewhat understood. On the issue of the appropriations because 
it's a big difference between an appropriation and getting 
periodically throughout the year the revenues from a surcharge. 
Is not that the way it is funded, Mr. Talbott, in this 
instance, the Universal Service Fund? It's the surcharges that 
are applied?
    Mr. Talbott. Yes.
    Senator Snowe. So you don't have the funds in hand 
consistently throughout the year in order to honor those letter 
of commitments, is that correct?
    Mr. Talbott. They are ongoing.
    Senator Snowe. The courts have recognized it's a unique way 
of financing the programs so it's not dependent like other 
programs on a one-time appropriation for the full cost of the 
program. It's ongoing throughout the year, depending on how the 
surcharges are collected, is that correct?
    Mr. Talbott. That is correct.
    Senator Snowe. That answers the problem. Now the question 
is why OMB's directive has wreaked such havoc because it's 
making the same, drawing the same correlation between a one-
time appropriation and ongoing surcharge. You're not going to 
have all the money for those commitments there at any one time 
but that you always have the money for that purpose at the time 
in which you're honoring the commitments, is that correct?
    Mr. Talbott. That is correct. Through the quarterly 
contribution.
    Senator Snowe. Right. So it seems to me that it just 
doesn't make practical sense to be requiring the Fund to adhere 
to the same standard as those agencies that receive a one-time 
appropriation. Not to mention the fact that it's not a tax 
revenue. I mean, it's not considered as taxes at least in the 
court mandates. That's OMB originally. I understand it's a 
different administration but the fact of the matter is it did 
apply it.
    The question is what is the net result? And that's the 
issue here because ultimately it's had a net effect of placing 
enormous uncertainty in the program. It has cost the program a 
great deal of money and yes, we are to resolve the issues for 
the long term, but there is a way in which to do all this.
    It's not as if the FCC does not have broad legal 
authority--and I'd like to follow that, Mr. Schlick, about what 
you are doing to establish orderly audits, to make sure we are 
not encountering any potential abuses. And I know, Ms. Dalton, 
you have done a very good job in your analysis and as Senator 
Rockefeller indicated, where there are problems, many of them 
have been resolved.
    And I think it's as a result of the FCC's high profile 
cases in trying to ferret out the abuses is what got the 
attention of OMB. Mr. Schlick, do you have broad authority 
under the law, under the Telecommunications Act of 1996, to 
administer the USF and do anything you need to do in order to 
be sure that these moneys are being appropriately administered?
    Mr. Schlick. We do have broad authority and to that I'd add 
the statutes that the Department of Justice can enforce, 
antitrust and other, to bring actions against those who would 
abuse the program.
    Senator Snowe. Are you using them?
    Mr. Schlick. We are attempting to. I have outlined some of 
the ways and let me just highlight those again. We are working 
on criminal enforcement in many cases through the Department of 
Justice, as well as civil. We are recovering funds and securing 
criminal prosecutions. We have expanded our audit program. We 
have an expansive audit program now, which Ms. Gelb can give 
you further details if you're interested.
    We have extended additional resources to oversight of the 
program, performance measurements to be sure that the program 
is doing what it is intended to do, and attempting to work with 
USAC to develop procedures that are as tight as possible.
    Mr. Talbott. We cooperate with USAC, with law enforcement 
and have a close working relationship with the FCC in this 
area. In fact, working with the FCC-IG, we are beginning to 
launch a program for 700 beneficiary audits across all four 
mechanisms. And I think the work that we are doing 
cooperatively is addressing this issue, and we will continue to 
address the issue because we want to solve the problem.
    Senator Snowe. If this--if the ADA is back to the full USF 
and I gather you are thinking it would once it expires at the 
end of this year, would you have to suspend the high cost 
program?
    Mr. Talbott. We would have to raise----
    Senator Snowe. Or double----
    Mr. Talbott. Raise the contribution factor or suspend it.
    Senator Snowe. 21, 25 percent?
    Mr. Talbott. 21, 22 percent based on today's contribution.
    Senator Snowe. What would be the net effect of that?
    Mr. Talbott. Significant.
    Mr. Schlick. Senator Snowe, I would expect that USAC would 
follow our direction on that. And the direction we gave them in 
September is the way the Fund is now being operated and is 
consistent with the Antideficiency Act. So based on our view at 
this point, we don't think that those sorts of modifications 
will be necessary.
    Senator Snowe. Mr. Talbott?
    Mr. Talbott. We have that question in writing and we are 
still waiting for a result on that.
    Senator Snowe. Question you are providing to whom?
    Mr. Talbott. To the FCC.
    Senator Snowe. So you're not convinced that this--you want 
to see their explanation?
    Mr. Talbott. I'm not convinced at this point. Just need 
clarification.
    Senator Snowe. That's important. We know that OMB has not 
responded, is that correct? Now, how does OMB feel about that? 
Do they feel that it consistently applies to the ADA at this 
point?
    Mr. Schlick. Yes. The Antideficiency Act applies.
    Senator Snowe. Do they think that it does? Do they think 
currently the high cost low cost program does?
    Mr. Schlick. You are correct. We are awaiting OMB's view on 
that.
    Senator Snowe. So you don't know whether or not they agreed 
with your assessment?
    Mr. Schlick. Yes. The response that Mr.----
    Mr. Talbott. It refers to what was provided by the FCC on 
October 2004 to the USF.
    Senator Snowe. Ms. Dalton, in your report, I'd be 
interested, Congress could give the FCC broad authority back in 
the Telecommunications Act in 1996 when we were drafting all 
this legislation to oversee the Universal Service Fund. You 
understand all these issues obviously.
    I think the question is, is there another way, I mean does 
the ADA really fit in this case. I mean, in terms of being 
applicable to the exigencies of this program, when you consider 
how they get their funds, and whether or not it takes either a 
period of adjustment for several years or whatever the case may 
be, I really don't know, but what I do know is the net effect 
of what has occurred.
    And so again, it gets back to common sense and practicality 
here. Not that we all disagree with the ultimate goal, but the 
question is, can you achieve that goal in another way. And you 
know, all I can say is somebody once said government does more 
harm inadvertently than it does by design. And so I think 
that's the bottom line of what has happened here with respect 
to this program and the directive from OMB.
    Ms. Dalton. With ADA, basically it's saying that you have 
to have the resources available for the obligations that you're 
committing to. But I think when you look at it, it was 
designed--and the way it's interpreted at this point--for your 
typical government program. And so it doesn't take into account 
in many ways the uniqueness of this program in terms of the 
resources it has available and how the money comes into the 
program, as well as how it goes out. So there may in fact be 
some other alternatives on how to address this issue.
    For example, using a targeted approach, the anticipated 
revenues coming into the program could be included as a 
budgetary resource. Similarly, on the other side in the 
commitments, USAC has had the experience over the last 7 years 
of sending out commitment letters, but obviously not all of 
those commitments are realized over the course of time. There 
may be 20 percent unexpended. I don't know exactly what the 
number is that the schools and libraries have not been able to 
use because they have had savings out there.
    So there is a way on the commitment side that hopefully 
with some guidance from Congress, they may be able to say that 
we are committing $100 million, but we recognize from 
experience that only $80 million of that will actually be 
spent.
    Senator Snowe. Mr. Talbott, how would you respond to that? 
Would you respond to what Ms. Dalton just said?
    Mr. Talbott. FCC has allowed those funds to be rolled over 
into the next year. If we have unused funds this year, they 
apply to the next year. So we are only a year behind with those 
funds.
    Senator Snowe. You are only a year behind, is that what 
you're saying?
    Mr. Talbott. Yes. Behind.
    Senator Snowe. Did you want, Ms. Gelb----
    Ms. Gelb. There is a rollover rule that we created a couple 
of years ago. If the question is every year the $2.2 billion 
being spent, I think the answer is no. But there is an increase 
potentially because of this rollover procedure that we have.
    Senator Snowe. So the commitment is they may be higher, 
they may not go up to the $2.2 billion. I see. But the 
commitments are greater than that?
    Mr. Talbott. Commitments are there. Then you adjust it.
    Senator Snowe. I appreciate that. Senator Sununu?
    Senator Sununu. Thank you. Couple of points of 
clarification. First, it's my opinion or my concern is much 
less for rural districts cited by Senator Rockefeller, rural 
Alaska, rural Maine for that matter, much less with their 
actions to effectively request and allocate and apply this 
money than it is for, say, large urban districts and suburban 
districts that don't necessarily need the resources as much as 
those rural districts.
    So I just want to be clear about where my concerns lie. I 
want to make sure all of them are using it efficiently, but I 
don't think anywhere in my remarks I suggested that I thought 
rural districts did a poorer job than others in performing in 
the use of these funds.
    Second, with regard to Mr. Schlick, you made the 
observation that the Antideficiency Act--in and of itself, 
applying the Antideficiency Act did not address the issues of 
waste, fraud and abuse. And I think that point is technically 
correct and from your position, but from a practical matter let 
us all be honest about what is happening here. We have 
legislation that proponents of the E-rate program in its 
current form want to see passed.
    We see concerns for reform that I and many others I would 
assume have. We see discussion about a telecommunications bill 
and Universal Service reform that is also taking place. And 
what is really the question is if the proponents want to exempt 
this program from the ADA, then we have an opportunity to force 
and require additional reforms to move perhaps in conjunction 
with that legislation, or as part of a telecommunications bill.
    So exemption from the ADA in and of itself may not address 
these reform issues, but from a practical matter they are 
absolutely, I think, should be on the table, part of this 
discussion and considered as part of this discussion because 
proponents of the program are obviously pursuing an exemption 
from these accounting standards.
    That's why I think it's important. But in and of itself, 
the application of the ADA or lack of application, is not going 
to address fraud and abuse, but this is an opportunity to make 
sure the program works as well as it possibly can.
    Mr. Talbott, a couple of final technical questions. I think 
you were asked before, but I did not hear the specific 
response. How much do you have on hand, does the corporation 
have on hand now?
    Mr. Talbott. Right about $3 billion. About $3.1 billion.
    Senator Sununu. How much of that has been committed? I have 
to ask that question.
    Mr. Talbott. $2.5 billion is committed.
    Senator Sununu. So you have already committed more than you 
are allowed to spend?
    Mr. Talbott. We are going back--that's how we get to that 
number.
    Senator Sununu. How much of that previous--is for previous 
funding years and how much is for current funding years?
    Mr. Talbott. I will get you that information. I do not have 
those numbers with me.
    Senator Sununu. Nobody back there has that number? It 
actually seems like a both simple and important number.
    Mr. Talbott. We will get it to you.
    Senator Snowe. Thank you all very much for being here this 
afternoon not to resolve these issues today, but hopefully we 
will resolve it this year, so we can provide it and it's 
essential. And also address the other issues that have been 
discussed. This hearing is adjourned.
    (Whereupon, at 3:55 p.m., the hearing was adjourned.)

                                  

```